WASHINGTON — The Financial Industry Regulatory Authority has fined two firms a total of $370,000 for violating securities rules in their management of Puerto Rico funds, and dinged another firm $50,000 for violating trade reporting requirements.
The self-regulator also filed complaints against several firms for alleged unfair markups and other rule violations.
Puerto Rico-based firms Oriental Financial Services Corp. and Popular Securities, Inc. each agreed to pay fines and possible restitution to settle FINRA findings that they failed to maintain and enforce proper supervisory procedures in the wake of Puerto Rico bond downgrades in 2012, FINRA said in its February disciplinary report released Tuesday. Without admitting or denying FINRA findings, Oriental agreed to pay $245,000 and Popular settled for $125,000.
At issue is the management of closed-end Puerto Rico bond funds marketed to residents of the financially distressed island. FINRA examiners found that, between July 1, 2011 and June 30, 2013, both firms solicited concentrated purchases of Puerto Rico securities designed to provide Puerto Ricans with a triple tax benefit. After Puerto Rico's general obligation bonds were downgraded, neither firm maintained or enforced effective procedures instructing supervisors to review the concentrations of the securities.
"Between July 2011 and June 2013, Oriental received a report for all solicited customer transactions that also identified the concentration level of that particular purchase as a percentage of the customer's stated net worth," FINRA's settlement with Oriental explained. "In July 2012, the firm distributed a guideline that suggested that supervisors 'may' consider concentration, which the firm defined as 'one position with greater than 50% total market value of the account,' when reviewing transactions. Despite having implemented the July 2012 guidelines, the firm did not require that supervisors review for concentrated purchases (i.e., concentration in a single security, substantially similar securities, or securities of a single geographic region), including PR securities, or document their reviews."
Oriental did retain a consultant who identified six "potentially unsuitable" Puerto Rico securities purchases, FINRA noted. Popular had similar trouble with its supervision.
"Popular's written supervisory procedures did not outline the steps that the firm should have taken to review its customers' securities purchases for concentration, and apart from a procedure that required quarterly reviews of 'elderly' customer accounts for concentration of one product in the client's account, the firm did not establish, maintain, or enforce any systems or procedures that required supervisors to review for concentrated purchases," FINRA concluded.
The authority said the firms' conduct violated its own Rule 2110, which requires "high standards of commercial honor," and its supervision rule. Oriental agreed to calculate restitution owed to customers, with interest, within 90 days of the settlement. Oriental and Popular were among several firms to be hit with thousands of requests for FINRA arbitration from investors who said the funds lost value following downgrades.
FINRA also fined New York-based Cantor Fitzgerald & Co. $50,000 for violations of Municipal Securities Rulemaking Board Rules. The self-regulator found that in April and May 2013 the firm failed to report 37 muni transactions to the real-time trade reporting system, over-reported 19 transactions, and reported 56 transactions with inaccurate information in violation of MSRB Rule G-14 on reports of sales or purchases. The firm also failed to provide customer confirmations in 49 instances, FINRA determined, and sent 15 confirmations that did not include required information such as the yield or call provisions of the bonds. That conduct violated Rule G-15 on confirmation, FINRA said. The self-regulator further alleged a violation of Rule G-27 on supervision, as the firm did not enforce its procedures that required comparisons of data to the firm's own trading data. Cantor agreed to settle the charges without admitting or denying the findings.
FINRA also filed complaints against other firms that have yet to settle. It charged Lansing, Mich.-based J.W. Korth & Company Inc. with making unfair markups on both muni and corporate bonds between 2009 and 2011.
It also charged Arkansas-based R.M. Duncan Securities, Inc. and two individuals associated with the firm with selling bonds to customers at prices as much as 60% higher than the prevailing market price. Tampa, Fla.-based Calton & Associates, Inc. turned around and sold those bonds at an unfair markup, FINRA alleged. FINRA said the firms schemed together to disguise the unfair prices, violating both federal securities laws and MSRB rules.
FINRA also filed a complaint against Los Angeles-based Wedbush Securities Inc. and some associated persons, charging that the firm violated the MSRB's fair-dealing rule when it falsified documents to make it appear it had been conducting reviews of its muni practices.
Representatives for the firms named in FINRA's report could not be reached for comment.
