WASHINGTON — StateTrust Investments, Inc. has been penalized $90,000 and censured by the Securities and Exchange Commission in a settlement over charges it broke Municipal Securities Rulemaking Board rules when it sold Puerto Rico bonds for an amount less than the issuer's specified minimum denomination.
In March 2014, the Miami, Fla.-based broker-dealer executed one transaction with a customer in an amount below $100,000, which was prohibited by the official statement unless the junk-rated Puerto Rico general obligation bonds were upgraded to investment-grade.
The firm canceled the transaction prior to settlement. But the SEC said the conduct was still a violation of the MSRB's Rule G-17 on fair dealing, as well as its Rule G-15 on confirmation, clearance and settlement practices, which prohibits sales under the stated minimum denomination except in limited circumstances.
"The limited exceptions provided under MSRB Rule G-15(f) for customer transactions in municipal securities below the minimum denomination of an issue did not apply to this transaction," the SEC said in its enforcement order, dated April 23. "StateTrust also failed to disclose to this customer, before or at the time of the trade, that the bonds were issued with a $100,000 minimum denomination, and to explain how this could affect the liquidity of the customer's position."
StateTrust consented to the order without either admitting or denying the SEC's findings. The firm did not return a phone call seeking comment.
The enforcement action follows another one, last November, in which the SEC charged 13 other firms with similar conduct, though they were not charged with violating G-17. Those charges, which were also settled, were the commission's first brought under that G-15 provision.
"Without commenting specifically on this action, we do sometimes offer incentives for parties to resolve violations at an early stage and those incentives may not be available once an investigation proceeds to a later stage," said SEC Enforcement Division director Andrew Ceresney.
The enforcement cases followed a story The Bond Buyer published in March that revealed broker-dealers -- in dozens of transactions executed between the morning of March 11, through the afternoon of March 18 -- sold bonds from a $3.5 billion Puerto Rico general obligation bond issue to customers in amounts below $100,000.
The idea behind the minimum denomination requirement was to ensure that the bonds would not be sold to retail customers who might not fully appreciate the risk of holding them. The bonds were rated BB+ by Standard and Poor's, Ba2 by Moody's Investors Service, and BB by Fitch Ratings. They would have to have been upgraded to an investment grade rating - BBB- or higher -- in order for the minimum denomination to drop to $5,000.
StateTrust was ordered to cease and desist from future violations and also agreed to undertake a review of its policies and procedures designed to prevent violations of securities laws and rules. The order requires that the firm provide the SEC staff with a copy of its updated written policies and procedures within six months.
The payment of the $90,000 penalty -- one of the highest the commission has levied in connection with the Puerto Rico bond sale - is to be split evenly between the U.S. Treasury and the MSRB.
