FINRA Issues Guidance on Short Positions and “Fails-to-Receive” in Municipal Securities Transactions

FINRA published a notice to remind firms engaging in municipal securities transactions that their written supervisory procedures should identify the firms' methodologies for detecting, resolving and preventing the consequences of short firm positions and fails-to-receive in municipal securities. FINRA also emphasized the need for written procedures to identify controls for ensuring that communications with customers regarding municipal securities transactions, including communications about the tax status of interest payments, are not false or misleading. FINRA also noted its discovery that, as a result of trading errors and inadequate firm controls, some customers who purchased tax-exempt municipal securities but hadn't received them were then paid substitute interest, which is not tax-exempt under the Internal Revenue Code.

FINRA recommended that firms carry out remedial actions in order to resolve municipal securities firm short positions, including procedures for spotting municipal securities trading activity that creates short firm positions inadvertently as early as the trade date. FINRA also stated that procedures designed to address fails-to-receive in municipal securities should be consistent with those used for closing out municipal securities transactions in accordance with MSRB Rule G-12(h).

See: FINRA Regulatory Notice 15-27.