WASHINGTON — The Financial Industry Regulatory Authority has fined three firms $242,500 for municipal rules violations.
They include $150,000 against Raymond James Financial Services Inc. for supervisory failures related to so-called 529 college savings plans it sold to clients and $80,000 against Neuberger Berman LLC for supervisory and timely reporting lapses.
In monthly disciplinary actions released Monday, the firm also announced that it had expelled Chicago-based CMG Institutional Trading LLC from FINRA membership and barred its president and chief executive, Shawn Derrick Baldwin, from associating with any FINRA member.
The sanctions were based on findings by FINRA's National Adjudicatory Council that the firm, acting through Baldwin, participated in municipal securities-related activities without employing a qualified muni principal; failed to timely file quarterly lists of issuers with which it engaged in muni business; and failed to adopt, maintain, and enforce written supervisory procedures, among several FINRA discoveries.
Meanwhile, the self-regulator announced it has filed an administrative complaint against Hansel Clarence Lee, of Burbank, Calif., for allegedly alleging misusing and misappropriating a customer's funds, which included municipal securities.
FINRA also fined New York-based Beech Hill Securities Inc. $12,500 for failing to timely report 41 muni trades to the Municipal Securities Rulemaking Board within 15 minutes, as required by the board's Rule G-14 on transaction reporting. FINRA also cited the firm for violating the MSRB's Rule G-27 on supervision.
The firms and individuals either could not be reached or declined to comment.
FINRA found that from August 2005 through October 2007, St. Petersburg, Fla.-based Raymond James violated the MSRB's Rule G-27 by failing to ensure compliance with internal policies and procedures tied to the sale of 529 college savings plans.
In addition, at various times during the review period, the firm violated MSRB Rules G-2 on professional qualifications, G-3 on classification of principals and representatives, and G-27 by allowing eight individuals to function as municipal securities principals while failing to have them registered or qualified in such capacities, FINRA said.
Of the 45,066 529-plan transactions during the review period, 1,359 involved new plan investments that amounted to $7 million and generated about $121,580 in revenues to the firm, FINRA found.
However, for 135 transactions, copies of a so-called No. 1529 form were not sent to branch managers for suitability reviews or to the compliance department for tracking, as mandated by the firm's written supervisory procedures. For 641 of the transactions, the forms were obtained only after Raymond James staff had inquired why they had not been filed.
For 135 transactions, the forms incorrectly state that an in-state tax deduction was not available to the customer when, in fact, one was available.
For 252 transactions, the forms indicated that branch managers had signed off on their own client transactions and there was no evidence these transactions were reviewed by an appropriately licensed principal in the sales and supervision department.
In a corrective action statement, the firm said that it has "promptly" taken several steps to enhance enforcement of its internal procedures and noted that it had not received any client complaints or requests to switch plans in instances where a customer purchased an out-of-state 529 plan in states that offer tax benefit only for in-state plans.
Meanwhile, during three quarterly periods in 2007 and 2008, FINRA found that New York-based Neuberger Berman failed to timely report a significant percentage of muni transactions within the 15-minute window required by the MSRB's Rule G-14 on trade reporting. The transactions constituted 17%, 22%, and 32.5% of the muni trades that the firm reported to the MSRB's Real-time Transaction Reporting System, or RTRS, during those quarterly periods.
Of the $80,000 fine, $25,000 was attributed for each of the three quarters in the review while $5,000 was attributed to supervisory failures across all three reviews.
Finally, in its administrative complaint, FINRA said that Lee misused and misappropriated customer funds while working under the auspices of Banc of America Investment Services Inc. Specifically, he sold securities in the customer's brokerage account and deposited proceeds from those sales into a checking account he opened in the customer's name but without his consent or knowledge.
The complaint alleges that Lee then requested a $500,000 check be drawn on the account, payable to a company under his control and ownership. When the check could not be processed, Lee requested other checks be drawn on the account payable to another company under Lee's ownership and control, and deposited them into his checking account, thereby misappropriating customer funds for his own purposes.
The complaint also alleges that Lee misused about $500,000 in funds from the customer by improperly selling treasuries and municipal bonds in the customer's account, without the customer's knowledge and permission. When the customer, who was not identified by name, confronted Lee about the sales of the treasuries and bonds, Lee told him he was mistaken and had not read the account statement correctly. In addition, FINRA said that Lee failed to respond to the self-regulator's requests for information and to provide on-the-record testimony.
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