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Regulation and Compliance > Federal Regulation > SEC

SEC Sanctions Schwab, TD Ameritrade, 11 Others on Puerto Rican Junk Bond Sales

By Melanie Waddell

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The Securities and Exchange Commission on Monday sanctioned 13 firms — including Charles Schwab, TD Ameritrade and Wedbush Securities — for improper sales of Puerto Rican junk bonds.

The enforcement actions are the SEC’s first under Municipal Securities Rulemaking Board Rule G-15(f), which establishes the “minimum denomination,” the smallest amount of the bonds that a dealer firm is allowed to sell an investor in a single transaction. 

In its surveillance of trading in the municipal bond market, the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit detected improper sales below a $100,000 minimum denomination set in a $3.5 billion offering of junk bonds by the Commonwealth of Puerto Rico earlier this year. 

The SEC’s subsequent investigation identified a total of 66 occasions when dealer firms sold the Puerto Rico bonds to investors in amounts below $100,000. 

On Monday, the agency instituted administrative proceedings against the firms behind those improper sales, which were: Charles Schwab & Co., Hapoalim Securities USA, Interactive Brokers LLC, Investment Professionals Inc., J.P. Morgan Securities, Lebenthal & Co., National Securities Corp., Oppenheimer & Co., Riedl First Securities Co. of Kansas, Stifel Nicolaus & Co., TD Ameritrade, UBS Financial Services and Wedbush Securities.

Each firm agreed to settle the SEC’s charges and pay penalties ranging from $54,000 to $130,000.

As the SEC explains, municipal issuers often set high minimum denomination amounts for so-called “junk bonds” that have a higher default risk that may make the investments inappropriate for retail investors. “Because retail investors tend to purchase securities in smaller amounts, this minimum denomination standard helps ensure that dealer firms sell high-risk securities only to investors who are capable of making sizeable investments and more prepared to bear the higher risk,” the SEC says.

“These actions demonstrate our commitment to rigorous enforcement of all types of violations in the municipal bond market,” said Andrew Ceresney, director of the SEC’s Division of Enforcement, in a statement. “We will act quickly and use all available tools to protect investors in municipal securities.”

LeeAnn G. Gaunt, chief of the SEC’s Municipal Securities and Public Pensions Unit added, “These firms violated a straightforward investor protection rule that prohibits the sale of muni bonds in increments below a specified minimum. We conduct frequent surveillance of trading in the municipal bond market and will penalize abuses that threaten retail investors.”   

— Check out Muni Bond Experts Sound Short-Term Warnings on Puerto Rico, Long-Term on Local Munis on ThinkAdvisor.

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