NewEdge Securities agreed to a censure and the imposition of monetary sanctions totaling more than $1 million by the Financial Industry Regulatory Authority, which found that the firm engaged in conduct that allowed it to get improper allocations of new issue municipal bonds.
Pittsburgh-based NewEdge accepted and consented to FINRA's findings without admitting or denying them, according to the settlement
NewEdge General Counsel David Schnier signed the agreement Feb. 24 and FINRA accepted it on March 21, according to the document, which indicated that NewEdge had been known earlier as Mid Atlantic Capital Corporation. In addition to consenting to the imposition of a censure, NewEdge agreed to pay a $275,000 fine and disgorgement of $750,746 plus interest.
"Issuers typically prioritize sales of bonds to retail and institutional customers, who are likely to hold the bonds rather than quickly trade them, over broker-dealers seeking bonds for their own inventories," FINRA said. "In addition, issuers often set a retail order period at the start of an offering to give retail customers a chance to purchase bonds before institutions."
Broker-dealers typically get the lowest priority in the order sequence and can be shut out if retail and institutional customer demand exceeds available allocations, FINRA said.
Between January 2018 and May 2022, the firm violated Municipal Securities Rulemaking Board Rules G-11 and G-17 "by submitting orders for new issue municipal bonds without disclosing that the bonds were for the firm's dealer account," FINRA found. In addition, NewEdge ran afoul of MSRB Rule G-14 by failing to report dealer transactions to the MSRB's Real-time Transaction Reporting System.
NewEdge between January 2018 and May 2022 submitted at least 189 orders to six underwriters for new issue muni bonds without disclosing that those orders were for the firm's dealer account, according to FINRA.
"These orders were placed by two firm branches founded and owned by two of the firm's registered principals, Principal A and Principal B," FINRA said. "The underwriters afforded NewEdge improper customer priority, and NewEdge obtained allocations for each of the 189 orders it placed for its dealer account."
The firm also submitted at least five orders to three underwriters for new issue muni bonds during the retail order period when the orders weren't for a retail customer, but were instead for NewEdge's dealer account.
"These orders were placed by the branches," FINRA said. "The underwriters afforded NewEdge improper retail priority, and NewEdge obtained allocations for each of the five orders it placed for its dealer account."
According to FINRA, between 2011 and 2016, the branches purchased and sold muni bonds on the secondary market.
"In 2016, Principal A tasked Representative 1, a registered representative of the firm employed by the branches, with establishing relationships with underwriters to facilitate purchases of new issue municipal bonds for the firm's dealer account," FINRA said. "Between 2018 and 2020, Representative 1 requested treatment of the branches as an institutional customer when introducing the branches to underwriters and also sent letters stating that the branches constituted a 'family office / RIA [registered investment adviser]' when they did not."
After establishing underwriter relationships on the premise that the branches were a customer – not a broker-dealer – "the branches then submitted the 194 at-issue orders without disclosing that the orders were for the firm's dealer account, which resulted in the firm receiving improper allocations of new issue municipal bonds," FINRA said.
"The branches then quickly resold the bonds on the secondary market, earning a total of $750,746 in ill-gotten gains," FINRA found.
In addition, between at least January 2018 and May 2022, the firm violated MSRB Rule G-27 "by failing to establish, maintain, and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to ensure compliance with MSRB Rules G-11 and G-14, and by failing to reasonably respond to red flags indicating it was obtaining improper allocations of new issue municipal bonds," FINRA found.
Also, between April 2015 and April 2023, the firm violated MSRB Rules G-9(b) and G-27(e) by failing to preserve and review roughly 30,000 Bloomberg instant messages, FINRA said.
"We are pleased to announce the resolution of this matter," a spokesperson for NewEdge Capital Group said in a statement emailed to The Bond Buyer on Monday. "The activity in question—specifically new issue municipal bond trading—was isolated to a single representative's management of personal assets within a legacy division acquired through previous business transactions."
That area "no longer constitutes a significant portion of our operations," the spokesperson said.
"We emphasize that throughout this matter, NewEdge Capital Group client funds were never at risk, no client assets were inappropriately utilized, and no clients were harmed," he said.
