Firm Settles FINRA Charges for Municipal Securities Close-Out Failures

A firm settled FINRA charges for failing to timely close out failed inter-dealer municipal securities transactions and failing to take prompt steps to obtain possession or control of customer securities.

According to the AWC, the firm failed to timely cancel or close out 209 inter-dealer transactions involving approximately $6.5 million in municipal securities. FINRA found that "[a]pproximately half of these fails-to-receive were aged over 50 days." Additionally, FINRA said the firm "failed to deliver 106 municipal securities totaling approximately $3.8 million" within the required timeframe. Further, because the firm relied on ineffective buy-in attempts rather than utilizing alternative solutions provided by the rule, the firm failed to take prompt steps to obtain "possession or control of 178 municipal securities totaling approximately $4.1 million" that the firm had failed to receive for more than 30 days.

FINRA determined that the firm failed to establish and maintain a reasonably designed supervisory system. FINRA said the firm’s written supervisory procedures lacked reasonable guidance regarding available close-out options. FINRA said the firm’s supervisory system did not reasonably track whether failed inter-dealer municipal securities transactions were closed out in a timely fashion. FINRA said the firm failed to provide guidance on how to obtain possession or control of securities the firm failed to receive.

FINRA concluded that the firm violated MSRB Rule G-12 ("Uniform Practice"), MSRB Rule G-27 ("Supervision"), Exchange Act Section 15(c)(3) ("Registration and regulation of brokers and dealers") and Rule 15c3-3 ("Customer protection-reserves and custody of securities"), and FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade"). 

The firm agreed to (i) a censure and (ii) a $1,250,000 fine (937,500 of which pertains to the violations of MSRB Rules G-12 and G-27).