The Financial Industry Regulatory Authority today charged five financial firms more than $4.5 million for unfairly obtaining reimbursement of fees that they had paid to the California Public Securities Association out of the proceeds of municipal and state bond offerings.
Finra claims the firms violated fair dealing and supervisory rules of the Municipal Securities Rulemaking Board by obtaining reimbursement for their voluntary payments to pay the lobbying group. The firms were fined more than $3.35 million and are required to pay a total of $1.13 million in restitution to certain issuers in California.
In settling the claims the five firms neither admitted nor denied the charges, but consented to the entry of Finra's findings.
FInra sanctioned the following firms: Citigroup – $888,000 fine and $391,106 in restitution; Goldman Sachs – $568,000 fine and $115,997 in restitution; JP Morgan – $465,700 fine and $166,676 in restitution; Merrill Lynch – $787,000 fine and $287,200 in restitution; and Morgan Stanley – $647,700 fine and $170,054 in restitution.
“Issuers are entitled to know what they are paying for and why,” Brad Bennett, Finra executive vice president and chief of enforcement, said in a statement. “It was unfair for these underwriters to pass along the costs of their Cal PSA membership to the municipal and state bond taxpayers, neglecting to disclose that these costs were unrelated to the bond deals.”
Finra claims that between January 2006 and December 2010, the five firms made payments to Cal PSA, an association that engages in a variety of political activities, including lobbying on behalf of companies seeking to influence California state government.
Finra alleges that the companies requested that those voluntary payments be reimbursed as underwriting expenses from the proceeds of the negotiated municipal and state bond offerings. This practice was unfair as Cal PSA's activities did not bear a direct relationship to those bond offerings and were not underwriting expenses.
Finra also claims that 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 Cal PSA's political activities.
In addition, Firna alleges that Citigroup, Goldman, Merrill Lynch and Morgan Stanley failed to have adequate systems and written supervisory procedures reasonably designed to monitor how the municipal securities associations used the funds that these firms paid.