SEC Fines Firms for Puerto Rico Sales

On Monday the SEC announced it was fining 13 firms for transactions associated with Puerto Rico debt issued last March. This is the first time the SEC has enforced Municipal Securities Rulemaking Board Rule G-15(f), which requires broker dealers to meet "minimum denomination" restrictions for securities issued after June 2002. For the $3.5 billion in Puerto Rico debt issued in March, that threshold was $100,000. Chief LeeAnn Gaunt of the SEC's Municipal Securities and Public Pensions Unit stated that the agency "…conduct(s) frequent surveillance of trading in the municipal bond market and will penalize abuses that threaten retail investors".

The minimum denomination amount for each municipal issuance sets the smallest amount any investor will be allowed to purchase in a single transaction. The minimum denomination is often related to the credit rating of the issuer, with low-rated bonds carrying higher minimum denominations. The March issuance was Puerto Rico's first since being downgraded below investment grade, which led that issuance to have a higher minimum amount. The SEC investigated trading in the bonds after they were brought to market and identified 66 occasions in which firms sold bonds to customers in amounts below the $100,000 minimum. The thirteen firms involved were fined a total of $883,200, with the two largest fines (25% of the total) being assessed against TD Ameritrade and Riedl First Securities (see table below).

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It is unclear exactly how the SEC determined the amount of the fine, as there is only a limited relationship between the number of violations and the amount of the fine. Six of the firms had only a single transaction that violated the minimum amount, and they were fined between 54 and 60 thousand dollars. Those with three or four violations were fined $61,200 to $67,800. UBS, with five violations, was fined only $56,400. Predictably, the two largest fines had the most violations, with 13 found at TD Ameritrade and 28 at Riedl First Securities.

Most firms declined to comment on the fines, except Charles Schwab which indicated that the four violations were unsolicited trades that were canceled immediately when the firm was alerted to them. All the firms that were fined cancelled the violating transactions and were given six months to review their existing policies and procedures for compliance with MSRB Rule G-15(f), and to make any changes necessary to insure future compliance.