Edward D. Jones Fined $300,000 for Failing to Disclose Municipal Bond Yields on Confirmations to Customers
Washington, D.C. — NASD announced today that it has censured and fined Edward D. Jones & Co., L.P. $300,000 for failing to disclose the yield to maturity on transaction confirmations issued to customers who sold municipal securities. The failures occurred in more than 86,000 transactions in the period from January 2003 to April 2004, involving total sales of over $1 billion. The firm was also charged with failing to establish a supervisory system and procedures designed to detect this failure.
The NASD settlement also requires Edward Jones to demonstrate that customer confirmations for municipal securities transactions contain the necessary disclosures, and to certify periodically for a two-year period that its customer confirmations comply with the MSRB Rule.
"Full and fair disclosure is the fundamental tenet of our industry," said Barry Goldsmith, NASD Executive Vice President and Head of Enforcement. "Disclosing the yield in municipal securities transactions - both purchases and sales - allows customers to evaluate the fairness of the price they paid or received for their bonds. The disclosure failures in this case deprived these selling customers of critical information."
The rules of the Municipal Securities Rulemaking Board (MSRB), which are enforced by NASD, require securities dealers to issue written confirmations to customers who have bought or sold municipal securities. The confirmations must include specific information regarding each transaction, including yields and dollar prices for the securities purchased or sold. For municipal bonds, the yield is generally the rate of return until the maturity date, taking into account the interest payments, the price of the bond, its redemption value and the amount of time remaining until maturity ("yield to maturity"). If the bond is priced on the basis of the yield to a call date or to a put date, this must be noted in the confirmation along with the date of the call or put and the dollar price on that date.
NASD found that Edward Jones included yield information in confirmations issued to customers when they purchased municipal securities. But because of a change in Edward Jones' automated systems, that information was omitted from the confirmations issued to customers who sold municipal bonds. From January 2003 until April 2004, there were approximately 86,478 such transactions involving total sales of approximately $1,650,304,650.
The MSRB has emphasized the importance of disclosing yield in municipal securities transactions. In a 1980 report, it stated:
Of the many possible relevant factors, the Board continues to be firmly of the view that the resulting yield to a customer is the most important one in determining the fairness and reasonableness of price in any given transaction. Such yield should be comparable to the yield on other securities of comparable quality, maturity, coupon rate, and block size then available in the market.
From May 1995 until April 2004, Edward Jones's supervisory system and its written supervisory procedures were not adequate to ensure that confirmations issued to its customers in municipal securities transactions disclosed the information required by the MSRB Rule, NASD found.
In settling this matter, Edward Jones neither admitted nor denied the charges, but consented to the entry of NASD's findings.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm, by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2004, members of the public used this service to conduct more than 3.8 million searches for existing brokers or firms and requested more than 190,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity 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 member firms. For information, please visit our Web site at www.nasd.com.