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The $3.4 Million Tip

The $3.4 Million Tip Blog Image

By FINRA Departments of Member Supervision and Enforcement

A call to FINRA’s Senior Helpline resulted in $3.4 million returned to approximately 300 customers.

In 1996, the Santa Rosa Bay Bridge Authority in Milton, Fla. issued bonds to raise capital for the construction of a bridge. Fast forward about 25 years to February 2021: A customer contacted FINRA’s Senior Helpline, concerned that he had been overcharged for his purchase of the Santa Rosa bridge bonds. He also told FINRA that he asked his brokerage firm about the overcharge, and that the firm had not provided an adequate response.

The bonds he and other customers purchased were “capital appreciation bonds”—meaning that all payments were intended to be made at maturity. But the bridge bonds fell into technical default in 2011. When the issuer started making accelerated principal payments to bondholders in 2013, the bonds started to trade at a lower price to take into account the reduced outstanding principal. This reduction is known as a “factor.”

Unlike the markets for other types of bonds, the municipal bond market does not have a robust infrastructure for informing market participants when municipal bonds trade with factors. Instead, investors and market participants rely on the trustee (as agent for the issuer) and data vendors for this information. For the Santa Rosa bonds, brokerage firms relied on inaccurate factors provided by data vendors, leading to many customers being overcharged for their bond purchases.

When investigating the customer complaint, FINRA’s Fixed Income Specialist Team observed that the Santa Rosa bonds were trading with a factor and discovered that the customer’s brokerage firm applied an incorrect factor. The Specialist Team contacted the firm, which agreed to pay the customer approximately $24,000—the amount of the overcharge plus interest.

FINRA did not stop there. The Specialist Team, aided by their Enforcement colleagues, analyzed records dating from 2013 through 2021 and found that the application of the inaccurate factor was a widespread problem. FINRA reached out to 30 brokerage firms involved with Santa Rosa bond transactions and presented the findings, which resulted in the firms reimbursing their customers for the overcharges.

With the firms’ cooperation, FINRA succeeded in getting more than $3.4 million returned to approximately 300 customers. The cross-team efforts demonstrate the important difference FINRA’s response to a single customer complaint can make and highlights FINRA’s commitment to its investor protection mission.