WASHINGTON — The Securities and Exchange Commission fined 13 firms for improperly selling Puerto Rico bonds in denominations below a $100,000 minimum set in a $3.5 billion offering earlier this year.
The SEC announced Monday that its investigation identified a total of 66 transactions in which dealer firms sold the Puerto Rico bonds to investors in amounts below $100,000, a violation of a Municipal Securities Rulemaking Board rule prohibiting such sales. The commission instituted administrative proceedings against the firms behind those improper sales: Charles Schwab & Co., Hapoalim Securities USA, Interactive Brokers LLC, Investment Professionals Inc., J.P. Morgan Securities, Lebenthal & Co., National Securities Corporation, Oppenheimer & Co., Riedl First Securities Co. of Kansas, Stifel Nicolaus & Co., TD Ameritrade, UBS Financial Services, and Wedbush Securities.
The actions follow a story The Bond Buyer published in March that said broker-dealers - in dozens of transactions executed between the morning of March 11, through the afternoon of March 18 - sold the Puerto Rico general obligation bonds to customers in amounts below $100,000. The OS for the bonds stipulated that they should not be sold in minimum denominations of less than $100,000 unless of one of three major rating agencies - Standard & Poor's, Moody's Investors Service and Fitch Ratings - upgraded the rating on them to investment-grade from speculative.
All three rating agencies gave the bonds speculative grade ratings when they were issued on March 11. S&P rated them BB+, Moody's Ba2, and Fitch BB. The bonds would have needed to be upgraded to an investment grade rating - BBB or higher - in order for the minimum denomination to drop to $5,000. The idea behind the minimum denomination requirement was to ensure the bonds would not be sold to retail customers who might not fully appreciate the risk of holding them. The MSRB's Rule G-15 on uniform practice requirements prohibits broker-dealers from executing trades in sizes below the minimum denomination set by the issuer, except in very limited circumstances.
The board's guidance on Rule G-17 on fair dealing says that a dealer would violate that rule if it fails to disclose to a customer that it is buying bonds below a required minimum denomination and that this could affect the liquidity of the customer's position. The firms cancelled many of the transactions as soon as they found out they were in violation, and they disappeared from EMMA within days.
Without admitting or denying the SEC's findings, each firm agreed to settle the SEC's charges and pay penalties ranging from $54,000 to $130,000. Riedl paid the largest fine at $130,000, followed by TD Ameritrade at $100,000.
"These actions demonstrate our commitment to rigorous enforcement of all types of violations in the municipal bond market," said Andrew Ceresney, director of the SEC's Division of Enforcement. "We will act quickly and use all available tools to protect investors in municipal securities."
The enforcement actions are the commission's first under that G-15 provision, the SEC said.
"These firms violated a straightforward investor protection rule that prohibits the sale of muni bonds in increments below a specified minimum," said SEC muni enforcement chief LeeAnn Gaunt. "We conduct frequent surveillance of trading in the municipal bond market and will penalize abuses that threaten retail investors."
The SEC's orders against the 13 dealers find that in addition to violating MSRB Rule G-15(f) by executing sales below the minimum denomination, they violated Section 15B(c)(1) of the Securities Exchange Act of 1934, which prohibits violations of any MSRB rule. The firms agreed to review their policies and procedures and make any changes that are necessary to ensure proper compliance with MSRB Rule G-15(f).
