In September and October, FINRA reported disciplinary actions against 4 broker-dealers that effected customer transactions in a municipal security in an amount lower than the allowable minimum denomination of the issue. The firms: (i) UBS Financial Services; (ii) Centennial Securities Company; (iii) B.C. Ziegler & Company; and, (iv) Hennion & Walsh.

 

WHAT IS THE RULE?   MSRB Rule G-15(f)(i) ... prohibits a broker, dealer, or municipal securities dealer from effecting a customer transaction in municipal securities in an amount lower than the minimum denomination of the issue. This applies to muni securities issued after June 2002.

 

• Issuers set minimum denominations for the purchase or sale of municipal securities and, generally, disclose those minimum denominations in Official Statements, which are documents prepared by or on behalf of the issuer of municipal securities in connection with a primary offering.

 

• Minimum denominations generally range from $5K to $100K, although an issue may set a minimum denomination at $100K or higher. One reason for setting a high minimum denomination is because the offered securities may not be appropriate for retail investors.

 

• There are 2 limited exceptions to executing transactions below the minimum denomination. However, neither applies to the cases cited in this article.

 

1)  FINRA CASE #2015046579201.    UBS Financial Services agreed to pay a $190K fine and revise its WSPs.

 

BACKGROUND.    UBS, based in Weehawken, NJ, has been a FINRA member firm since 1936. However, FINRA observed in its that customer transactions below an issue's minimum denomination. Additionally. as part of an undertaking, the SEC required the Firm to review its Rule G- 15(f) policies and procedures, and thereafter make such changes as necessary to effect compliance with Rule G-15(f) within six months of the SEC Order.

 

FINRA FINDINGS.    The SEC sanctioned UBS in November 2014 in connection with 5 customer muni securities transactions below an issue's minimum denomination. The firm agreed to pay a $56K fine and revise its WSPs to settle the SEC charges.

 

FINRA found that the firm’s supervisory system remained deficient, even after that SEC order. And due to these ongoing deficiencies, UBS executed 87 more transactions below the minimum denominations of an issue.

►   59 of these transactions occurred before the SEC Order;
►   9 occurred during the 6 months following the SEC order, in which UBS was reviewing and amending its pols and procedures; and
►   19 transactions occurred after any identified amendments to the firm's pols and procedures were supposed to have been implemented.

 

Additionally, UBS failed to disclose all material facts concerning 59 muni securities transactions at or prior to the time of trade. Specifically, the firm failed to inform its customers that the muni securities transactions were in amounts below the minimum denomination of the issue.

 

And the importance of this disclosure?  The small size of such transactions may adversely affect the liquidity of customers’ positions – regardless of whether each customer holds or would hold the position until maturity or redemption.

 

2)  FINRA CASE #2015046579201.    Centennial Securities Company agreed to pay a $45K fine, revise its WSPs, and offer rescission to customers.

 

BACKGROUND.    Centennial Securities, based in Grand Rapids, MI, has been a FINRA member since 1979.

 

FINRA FINDINGS.    From December 2013 through December 2014, Centennial effected 25 customer transactions in a muni security in an amount lower than the minimum denomination of the issue. Additionally, Centennial failed to disclose all material facts concerning 36 muni securities transactions at or prior to the time of trade. Specifically, the firm failed to inform its customers that the muni securities transactions were in amounts below the minimum denomination of the issue.

 

3)  FINRA CASE #2015046579201.    B.C. Ziegler and Company agreed to pay a $30K fine.

 

BACKGROUND.    B.C. Ziegler and Company, based in Chicago, IL, has been a FINRA member since 1948. Ziegler is a full-service brokerage firm with approximately 30 branches and 194 registered persons.

 

FINRA FINDINGS.    On 3 occasions between September 2014 and May 2015, Ziegler effected a customer purchase of a municipal securities in an amount below the required minimum denomination. Additionally, in December 2013, Ziegler failed to disclose all material facts concerning 52 muni securities transactions at or prior to the time of trade. Specifically, the firm failed to inform its customers that the muni securities transactions were in amounts below the minimum denomination of the issue.

 

FYI:  FINRA addresses in this case certain violations pertaining to Ziegler’s business as an underwriter in municipal offerings. These issues are unrelated to the nature of subject of this posting.

 

4)  FINRA CASE #2015046579201.    Hennion & Walsh agreed to pay a $55K fine.

 

BACKGROUND.    Hennion & Walsh, based in Parsippany, NJ, has been a FINRA member since 1989. The firm has approximately 140 registered reps.

 

FINRA FINDINGS.    Between December 2013 and March 2015, Hennion & Walsh effected 65 transactions in 6 municipal bonds below the minimum denomination set for the bonds. For 63 of those transactions, the firm failed to disclose all material facts concerning 52 muni securities transactions at or prior to the time of trade. Specifically, the firm failed to inform its customers that the muni securities transactions were in amounts below the minimum denomination of the issue.

 

FYI:  FINRA addresses several instances in which bond issues restricted for purchase to Qualified Institutional Buyers ("QIBs") were sold by Hennion & Walsh to non-QIBs. These issues are unrelated to the nature of subject of this posting.

 

 

FINANCIALISH TAKE AWAYS.    In each cited case, the firm committed 2 violations: (i) the firm effected customer transactions in a municipal security in an amount lower than the minimum denomination of the issue; and, (ii) the firm failed to disclose all material facts concerning municipal securities transactions at or prior to the time of trade.

 

Why did each firm fail to disclose all material facts? (i.e., not inform its customers that the muni securities transactions were in amounts below the minimum denomination of the issue?) According to FINRA examiners, each firm's supervisory system (or WSPs) did not:

(i) identify the person responsible for supervision with respect to the applicable rules;

(ii) provide the supervisory steps to be taken by the identified person(s);

(iii) note how often such person should take such steps; and,

(iv) note how such supervisory procedures should be documented.  

 

THE 'WSP MONTRA': Who, What, When, and How? That’s what a firm’s written supervisory policies and procedures (WSPs) manual should detail.

• WHO is/are the person(s) responsible for supervision with respect to the applicable rules?
• WHAT are the supervisory steps to be taken by the identified person(s)?
• WHEN should such person(s) be taking such steps?
• HOW should such supervisory procedures be documented?

 

If a firm’s WSPs do not provide this level of detail for each and every area of supervision, then it’s incomplete and doing a disservice to its supervisory personnel. How else are people to know what they need to do in order to completely and objectively fulfill their responsibilities?

 

IT’S NOT ROCKET SCIENCE – IT’S HARD WORK.

 

FINANCIALISH TAKE AWAYS – TAKE 2.    Earlier in 2017, FINRA reported on disciplinary actions against 4 other broker-dealers for violations similar in nature to those discussed in this article. The fines in these earlier cases ranged from $32.5K to $210K.

 

Click the following links to access those stories:

WWW: Broker-Dealer Gets Dinged for Avoidable Sales Errors (4/11)

B/D's Muni Bond Sales Were in Violation of MSRB Rules (5/31)

Muni ‘Mini’ Denominations – More Brokers-Dealers Cross the Line (10/17)

 

These cases were reported in FINRA Disciplinary Actions for September and October 2017.

For details on any of these cases, go to ...  FINRA Disciplinary Actions Online, and refer to the respective AWC #.