FINRA Orders Firms To Pay $4.48M

WASHINGTON — The Financial Industry Regulatory Authority has ordered five firms to pay $4.48 million for unfairly using bond proceeds to pay reimburse themselves for membership fees they paid to the California Public Securities Association, a lobbying group.

Of the $4.48 million, $3.35 million are fines and $1.13 million is restitution to be paid to issuers in California.

The firms, all headquartered in New York City, and sanctions are: Citigroup Global Markets, Inc. — $888,000 fine and $391,106 in restitution; Merrill Lynch, Pierce, Fenner & Smith, Inc. — $787,000 fine and $287,200 in restitution; Goldman, Sachs & Co. — $568,000 fine and $115,997 in restitution; Morgan Stanley & Co. — $647,700 fine and $170,054 in restitution; and J.P. Morgan Securities LLC — $465,700 fine and $166,676 in restitution.

The firms neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

"Issuers are entitled to know what they are paying for and why," said Brad Bennett, FINRA executive vice president and chief of enforcement. "It was unfair for these underwriters to pass along the costs of their CalPSA membership to the municipal and state bond taxpayers, neglecting to disclose that these costs were unrelated to the bond deals."

FINRA's probe began in January of last year, after several CalPSA member-firms reported receiving letters from the self-regulator seeking information about their CalPSA payment and reimbursement practices.

Soon after that, California Treasurer Bill Lockyer said he wanted underwriters to stop passing such fees on to issuers in the state and that he planned to recoup fees reimbursed from bond proceeds since 2005. In April 2011, Lockyer announced he had recouped $2.67 million of firms' payments to CalPSA that were reimbursed though bond fees. However, some firms such as the former Lehman Brothers and UBS Securities refrained from paying back the fees, he said.

In its probe, FINRA found that between January 2006 and December 2010, these five firms made a total of $1.51 million of payments to CalPSA, which lobbies California state officials and lawmakers on behalf of banks and broker-dealers, and passed on those fees on to issuers in 866 negotiated state and local bond offerings.

According to FINRA, from about Jan. 1, 2006 to May 1, 2010, CalPSA requested its members pay underwriting assessments of about $0.01 per bond in issues of more than $2 million and with more than two years to maturity.

As a result, for a $100 million bond issue outstanding for more than two years, an underwriter would take an assessment of $1,000.

In May 2010, CalPSA asked the underwriting assessment be increased to $0.02 per bond, but capped its assessments at $25,000 per bond issue. CalPSA billed the firms for these amounts whether or not it provided any services related to the underwriting.

"This practice was unfair as CalPSA's activities did not adequately disclose the relationship to those bond offerings and were not underwriting expenses," FINRA said. "Also the firms did not adequately disclose the nature of the fees to issuers and failed to establish reasonable procedures in this area. In fact, the need for adequate policies and procedures in this area was heightened in light of the nature of CalPSA's political activities."

FINRA said the reimbursements violated the Municipal Securities Rulemaking Board's Rule G-17 on fair dealing and Rule G-27 on supervision because the firms failed to have adequate systems and written supervisory procedures in place.

The restitution amounts, in four of the five cases, equal the firms' assessments to CalPSAs minus the fees refunded to issuers through Lockyer. But FINRA indicated firms may still be refunding fees to Lockyer. Spokespersons for all of the firms, except JPMorgan, said the firms were pleased to resolve this matter. JPMorgan's spokesperson declined to comment.

CalPSA officials could not be reached for comment.