FINRA Fines Firm for Municipal Bond Disclosure Failures

A firm settled FINRA charges for supervisory and disclosure deficiencies related to municipal bonds traded at a market discount.

According to the AWC, the firm failed to make required time-of-trade disclosures on certain municipal bonds trading at a market discount and that returns from accretion could be taxable as ordinary income. FINRA found the firm omitted material disclosures in "1,918 transactions" involving 130 customers and about $40 million in principal. FINRA said the firm relied on a third-party vendor but lacked procedures for supervising the vendor or verifying that customers purchasing bonds with non-de minimis discounts received the disclosures.

FINRA stated the firm later provided the disclosures, offered compensation for any adverse tax consequences, and—together with its vendor—implemented an automated system requiring customers to acknowledge the potential tax implications before completing trades.

FINRA determined that the firm violated MSRB Rules Rule G-27 ("Supervision") and Rule G-47 ("Time of Trade Disclosure"). 

To settle the matter, the firm agreed to (i) a censure and (ii) a $125,000 fine.