WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Southwest Securities, Inc. of Dallas $500,000 for using paid consultants to solicit municipal securities business and for violations of other Municipal Securities Rulemaking Board (MSRB) rules.
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "Southwest's payments to former municipal insiders and others to solicit municipal securities business on its behalf contravened the MSRB's prohibition against such activity, and threatened to compromise the integrity of the municipal securities market."
FINRA found that during the period from October 2006 through April 2009, Southwest paid five individuals, including three former Texas municipal issuer officials, to solicit municipal securities business on its behalf. The consultants assisted Southwest in obtaining a total of 24 municipal securities underwritings and two roles as financial advisor to Texas municipalities. Southwest paid the consultants more than $200,000 for their services.
Pursuant to the consulting agreements that Southwest had with two of the individuals, the consultants were contracted to "promote the capabilities of Southwest's municipal bond department in their desire to earn mandates as financial advisor and municipal underwriter for public entities throughout Texas." For their services, the consultants were promised, among other things, a percentage of Southwest's profits from any municipal securities business they helped to solicit.
In addition to the formal consulting arrangements, Southwest also made one-time payments totaling more than $26,000 to three other individuals in connection with their roles in obtaining municipal securities business for the firm.
FINRA also found that Southwest violated the MSRB's rules by failing to file 10 MSRB Forms G-36(OS) and G-36(ARD) in a timely manner and for inaccurately reporting more than 300 municipal securities transactions to the MSRB.
FINRA found that during the period from October 2006 through February 2009, Southwest had inadequate systems and procedures to supervise certain aspects of its municipal securities business. The firm's procedures had not been amended to reflect the 2005 amendment to MSRB Rule G-38 that prohibited payments to unaffiliated individuals for the solicitation of municipal securities business. In addition, the firm failed to enforce its procedures regarding compliance with the MSRB rule that regulates political contributions. The firm's procedures required that all municipal finance professionals clear their political contributions through the Compliance Department prior to making the contributions; however, no such pre-approval process was ever implemented. In effect, Southwest's inadequate supervisory systems and procedures failed to detect that one of its municipal professionals had made a political contribution. This led to the firm engaging in prohibited municipal securities business in violation of MSRB Rule G-37, for which the Securities and Exchange Commission brought a regulatory action against Southwest in March 2010.
As part of the settlement, Southwest is required to have an officer of the firm confirm to FINRA that Southwest has reviewed its compliance systems and procedures in accordance with all applicable MSRB rules and certify that its systems and procedures are reasonably designed to achieve compliance with the rules.
In concluding this settlement, Southwest neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
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