October 5, 2021

Broker-Dealer Settles FINRA Charges for Municipal Security Short Position Supervisory Failures

A broker-dealer settled FINRA charges for failing to adequately supervise short positions in municipal securities, resulting in a failure to cover short positions within the required time frame of 30 days.

As explained in its Letter of Acceptance, Waiver and Consent ("AWC"), FINRA determined that the broker-dealer's supervisory system and written supervisory procedures did not sufficiently account for (i) identifying and resolving short positions in municipal securities or (ii) minimizing the impact of such positions on the customers in possession of such municipal securities. FINRA found that the broker-dealer had hundreds of aged short positions in municipal securities.

In addition, FINRA found that the broker-dealer did not provide its affected municipal securities customers with adequate notice regarding the substitute interest they received on failed positions with the broker-dealer. Specifically, the broker-dealer did not communicate to the customers that the interest they received was taxable, which prevented the customers from making an informed decision regarding whether they wanted to (i) keep holding the security, (ii) call off the trade, or (iii) buy a comparable security to prevent receipt of the taxable interest.

As a result of its findings, FINRA determined that the broker-dealer violated MSRB Rules G-17 ("Conduct of Municipal Securities and Municipal Advisory Activities") and G-27 ("Supervision") under SEA Rule 15c3-3(d)(4), and FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").

To settle the charges, the broker-dealer agreed to (i) a censure, (ii) a $1.5 million fine, of which $1 million is for the MSRB Rule violations and (iii) the undertakings detailed in the AWC.