Edward Jones agreed Thursday to pay the Securities and Exchange Commission more than $20 million to settle charges that the firm and the former head of its municipal underwriting desk overcharged customers in new municipal bond sales.
The charges against the St. Louis-based brokerage firm come in the first case the SEC has levied against an underwriter for pricing-related fraud in the primary market for municipal securities.
The more than $20 million fine includes nearly $5.2 million in disgorgement and prejudgment interest that will be distributed to current and former customers who were overcharged for the bonds.
Stina Wishman, Edward Jones’ former municipal underwriting desk head, agreed to pay $15,000 and will be barred from working in the securities industry for at least two years.
Both Edward Jones and Wishman consented to the SEC order without admitting or denying the findings.
“Edward Jones undermined the integrity of the bond underwriting process by overcharging retail customers by at least $4.6 million and by misleading municipal issuers,” said Andrew Ceresney, director of the SEC Enforcement Division, in a statement announcing the fines. “This enforcement action, which is the first of its kind, reflects our commitment to addressing abuses in all areas of the municipal bond market.”
Municipal bond underwriters are required to offer new bonds to their customers at what is known as the “initial offering price,” which is negotiated with the issuer of the bonds.
An SEC investigation found that instead of offering bonds to customers at the initial offering price, Edward Jones and Wishman took new bonds into Edward Jones’ own inventory and improperly offered them to customers at higher prices.
“In other instances, Edward Jones entirely refrained from offering the bonds to its customers until after trading commenced in the secondary market, and then offered the bonds at prices higher than the initial offering prices,” the SEC said.
Edward Jones said in a statement that the settlement relates to certain practices between 2009 and 2013, and that about 13,000 current and former Edward Jones clients will receive “full compensation, including interest, as a result of the settlement.”
“The investigation has been disclosed in the firm’s regulatory filings going back to 2012 and we’ve cooperated fully with the SEC,” Edward Jones said.
According to the SEC’s order instituting a settled administrative proceeding against Edward Jones, the firm’s supervisory failures related to dealer markups on secondary market trades that involved the firm purchasing municipal bonds from customers, placing them into its inventory, and selling them to other customers often within the same day. Because of the short holding periods, the firm faced little risk as a principal and almost never experienced losses on these intraday trades. The SEC’s investigation found that Edward Jones’ supervisory system was not designed to monitor whether the markups it charged customers for certain trades were reasonable.
“Because current rules do not require dealers to disclose markups on municipal bonds, investors receive very little information about their dealer’s compensation in municipal bond trades,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, in a statement. “It is therefore important that firms have adequate supervisory systems to ensure that they are complying with their fair pricing obligations.”
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