FINRA Announces Focus on Municipal Bond Dealers

At a fixed-income conference in New York on Monday, FINRA CEO Richard Ketchum announced that FINRA has plans to increase inquiries into the $2.9 trillion municipal bond market ("Finra Steps Up Review of Muni Dealers," Wall Street Journal, March 8, 2011). The regulatory agency's plans also include bringing a series of new enforcement actions against the dealer firms that underwrite such bonds.
According to the WSJ, FINRA is mostly concerned with:

  • The quality of disclosures made to retail investors prior to the purchase of individual bonds;
  • Dealers who use taxpayer funds to ply issuer officials with food, drinks, and entertainment; and
  • Dealers who seek to influence rating agency officials through the provision of "excessive entertainment."

Ketchum said FINRA also expects to bring enforcement actions against and impose sanctions on firms that fail to provide bond offering documents to investors within the time frames specified by MSRB rules, use bond proceeds to pay dealer-controlled political action committees (PACs), and/or make false reports of issuer payments ("2nd UPDATE: Finra Chief Outlines Muni Enforcement Efforts," Wall Street Journal, March 7, 2011).
This week also marked FINRA's first enforcement action of a 2005 amendment to an MSRB rule that prohibits municipal dealers from paying unaffiliated consultants to solicit business on their behalf. Dallas-based Southwest Securities, Inc. was fined $500,000 for violating the amendment over a period of about two-and-a-half years.


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