Eight Brokerage Firms Pay Over $610,000 to Settle NASD Charges of Municipal Price Violations
Washington, D.C.—NASD announced today that it has ordered eight firms to pay fines totaling $310,000 and restitution to customers of $300,000 in connection with certain municipal bond trades where customers did not receive a fair price for their bonds, in violation of Municipal Securities Rulemaking Board (MSRB) rules.
The eight firms named in these actions, and the amounts they are paying in fines and restitution, are:
|Charles Schwab & Co, Inc.||$30,000||$30,869|
|First Trust Portfolios L.P||$60,000||$58,680|
|Merrill Lynch, Pierce, Fenner & Smith Inc.||$55,000||$54,527|
|Morgan Stanley DW Inc.||$20,000||$18,312|
|Prudential Equity Group, LLC||$10,000||$7,306|
|UBS Financial Services Inc.||$100,000||$100,666|
|Wachovia Securities, LLC.||$20,000||$19,486|
NASD found that some customers of these firms received below-market prices when selling their municipal bonds to the eight firms, as evidenced by the fact that the bonds were subsequently resold by other dealers -- often in same-day transactions -- at markedly higher prices, in violation of MSRB Rules G-30 and G-17. Those rules require municipal bond dealers, regardless of the compensation received by the dealers, to deal fairly with their customers and to buy and sell bonds at fair prices.
One of the factors firms must consider in determining a fair price is the fair market value of the bonds at the time of the transaction. When selling a bond for a client, dealers have the responsibility to make an accurate determination of the value of the specific bond. In many instances, including the cases at issue here, when customers ask dealers to sell their bonds, the dealer contacts what is known as a "broker's broker" to seek bids from other dealers for the customer's bonds. When the broker's broker conveys bids from other dealers for the customer's bonds, the customer's dealer sells the customer's bonds to the broker's broker. The broker's broker then sells the bonds to the firm that had expressed an interest in buying the customer's bonds.
In these cases, NASD found that in subsequent trading of the customers' bonds, the prices paid were higher than the prices the customers had originally received, which indicated that the customers had not received fair prices for the bonds the customers sold. By relying solely on the prices provided by the broker's broker to determine the fair market value of the bonds, the customers' dealer breached their duty to ensure that their customers received a price for their bonds that was reasonably close to fair market value.
"Unlike a traditional mark-up case involving unfair profits to the dealer, these cases involve dealers who failed to take reasonable steps to obtain fair prices for their customers," said Mary Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. "Dealers in municipal bonds are obligated to make requisite efforts to ensure that the transaction prices are reasonably related to market value, regardless of the amount of compensation they receive."
NASD is currently investigating the conduct of the broker's brokers involved in these transactions and their compliance with MSRB Rules. The rules require broker's brokers to make a reasonable effort to obtain a price for a firm selling its customers' bonds that is fair and reasonable in relation to prevailing market conditions.
In concluding these settlements, the firms neither admitted nor denied the charges.
Investors can obtain more information about, and the disciplinary record of any NASD-registered broker or brokerage firm by contacting NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2003, members of the public used this service to conduct more than 2.9 million searches for existing brokers or firms and requested almost 180,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to the program by going online to http://www.nasdbrokercheck.com/. Investors can also access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business — from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at http://www.nasd.com/.