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From Securities Regulation Daily, August 13, 2015

Edward Jones muni price penalty spurs SEC call for rules

By Mark S. Nelson, J.D.

Edward D. Jones & Co., L.P. and Stina R. Wishman, the former head of the retail broker’s municipal syndicate desk, agreed to pay more than $20 million to settle charges the firm overcharged its customers for new municipal bonds and failed to monitor the reasonableness of markups it charged on bonds sold in the secondary market. Both Edward Jones and Wishman settled the first-ever matter without admitting or denying the SEC’s findings (In the Matter of Edward D. Jones & Co., L.P., Release No. 33-9889, August 13, 2015; In the Matter of Stina R. Wishman, Release No. 33-9890, August 13, 2015).

Andrew J. Ceresney, Director of the SEC’s Enforcement Division, emphasized the need to protect the integrity of municipal securities markets in a conference call with reporters this morning. “We think the actions filed today shine a light on areas of the market that have traditionally had little enforcement attention.” He also said the agency has enhanced its expertise in municipal markets.

Four of the SEC’s commissioners also took the unusual step of issuing a joint statement late today urging the Financial Industry Regulatory Authority, Inc. and the Municipal Securities Rulemaking Board to move ahead with rules revamps that would deal with pricing in municipal securities markets. Commissioners Luis A. Aguilar, Daniel M. Gallagher, Kara M. Stein, and Michael S. Piwowar said the Commission should propose rules if FINRA and the MSRB cannot finish theirs.

Pricing, mark-ups. The SEC targeted Edward Jones on two fronts: pricing in negotiated offerings and secondary market transactions. The agency said Edward Jones charged customers too much for bonds it sold as co-manager of negotiated municipal offerings. In some instances, Edward Jones did not sell bonds until they began trading in secondary markets, and then at prices above the initial offering price.

As an example, the SEC cited Edward Jones’s improper sales of Build America Bonds, a taxable bond by which a municipal issuer can replace a tax exemption with a federal subsidy in order to cut borrowing costs. Edward Jones sold much of its allocation in one offering at prices above the initial offering price, which meant the BABs had more than a de minimis premium and thus failed to qualify for favorable tax treatment. Edward Jones would eventually pay $350,000 as reimbursement for the issuers having paid that sum to end its dispute with the Internal Revenue Service.

According to the SEC, Edward Jones wrongfully made $4.6 million from selling 156 bonds in 75 negotiated offerings, not including fees it made as a syndicate member. The conduct eyed by the SEC took place between February 2009 and December 2012.

Wishman, who joined Edward Jones in 1982, created and served as head of the firm’s municipal syndicate desk for 20 years, until she retired in July 2014. The desk’s goal was to improve Edward Jones’s access to new bond offerings whose issuers wanted to tap the firm’s diverse retail customers.

In still other instances, Edward Jones ran afoul of rules that required the firm to keep tabs on the reasonableness of mark-ups it charged on principal trades in secondary markets. The SEC’s order noted that Edward Jones often held bonds in its inventory only briefly, which facilitated intraday trades that posed minimal position risk to the firm and produced rare intraday transaction losses.

The SEC acknowledged that Edward Jones had voluntarily taken remedial steps to deal with problems it had in secondary markets. These efforts, begun in February 2014, included disclosure of the percent and dollar amount of mark-ups and mark-downs.

But LeeAnn Ghazil Gaunt, Chief of the Municipal Securities and Public Pensions Unit within the SEC’s Enforcement Division, noted that existing rules do not mandate this type of disclosure. FINRA and the MSRB have previously asked for comments on their companion proposals to improve price disclosure in fixed income markets. In his call with reporters, Ceresney declined to speculate on the Commission’s policy options in this area because he focuses on enforcement matters.

The SEC studied the $3.7 trillion municipal securities market in July 2012. That report looked at many issues, including the requirement that pricing be fair and reasonable in light of all relevant factors. Specific recommendations included calling on the MSRB to do more to ensure adequate disclosure of mark-ups and mark-downs regarding prevailing market prices and in riskless principal transactions.

Fund for customers. Edward Jones will pay over $20 million total, including a $15 million civil money penalty ($1.5 million of which goes to the MSRB) and more than $5 million in disgorgement, which it must use to pay back customers. The firm’s current and former customers will be paid based on a formula that makes adjustments to the price they paid for the affected bonds. But these payments will not include small BAB de minimis premium refunds customers have already received.

Wishman must pay a civil money penalty of $15,000 and comply with expansive securities industry bars for at least two years, the earliest time she can ask to have her industry privileges restored. Edward Jones and Wishman also must abide by cease and desist orders.

The releases are Nos. 33-9889 and 33-9890.

Companies: Edward D. Jones & Co., L.P.; Financial Industry Regulatory Authority, Inc.; Municipal Securities Rulemaking Board

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