13 FIRMS SANCTIONED BY SEC FOR VIOLATING RULE TO PROTECT SMALL INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
November 3, 2014

The Securities and Exchange Commission sanctioned 13 firms for violating a rule primarily designed to protect retail investors in the municipal securities market.

All municipal bond offerings include a “minimum denomination” that establishes the smallest amount of the bonds that a dealer firm is allowed to sell an investor in a single transaction.  Municipal issuers often set high minimum denomination amounts for so-called “junk bonds” that have a higher default risk that may make the investments inappropriate for retail investors.  Because retail investors tend to purchase securities in smaller amounts, this minimum denomination standard helps ensure that dealer firms sell high-risk securities only to investors who are capable of making sizeable investments and more prepared to bear the higher risk.

In its surveillance of trading in the municipal bond market, the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit detected improper sales below a $100,000 minimum denomination set in a $3.5 billion offering of junk bonds by the Commonwealth of Puerto Rico earlier this year.  The SEC’s subsequent investigation identified a total of 66 occasions when dealer firms sold the Puerto Rico bonds to investors in amounts below $100,000.  The agency instituted administrative proceedings against the firms behind those improper sales: Charles Schwab & Co., Hapoalim Securities USA, Interactive Brokers LLC, Investment Professionals Inc., J.P. Morgan Securities, Lebenthal & Co., National Securities Corporation, Oppenheimer & Co., Riedl First Securities Co. of Kansas, Stifel Nicolaus & Co., TD Ameritrade, UBS Financial Services, and Wedbush Securities.

The enforcement actions are the SEC’s first under Municipal Securities Rulemaking Board (MSRB) Rule G-15(f), which establishes the minimum denomination requirement.  Each firm agreed to settle the SEC’s charges and pay penalties ranging from $54,000 to $130,000.

“These actions demonstrate our commitment to rigorous enforcement of all types of violations in the municipal bond market,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “We will act quickly and use all available tools to protect investors in municipal securities.”

LeeAnn G. Gaunt, Chief of the SEC’s Municipal Securities and Public Pensions Unit added, “These firms violated a straightforward investor protection rule that prohibits the sale of muni bonds in increments below a specified minimum.  We conduct frequent surveillance of trading in the municipal bond market and will penalize abuses that threaten retail investors.”  

The SEC’s orders against the 13 dealers find that in addition to violating MSRB Rule G-15(f) by executing sales below the minimum denomination, they violated Section 15B(c)(1) of the Securities Exchange Act of 1934, which prohibits violations of any MSRB rule.  Without admitting or denying the findings, each of the firms agreed to be censured.  They also agreed to review their policies and procedures and make any changes that are necessary to ensure proper compliance with MSRB Rule G-15(f).

The SEC’s investigation, which is continuing, is being conducted by Joseph Chimienti, Sue Curtin, Heidi M. Mitza, and Jonathon Wilcox with assistance from Kathleen B. Shields.  The case is supervised by Kevin B. Currid and Mark R. Zehner.  The SEC appreciates the assistance of the MSRB.