FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
08/13/2015 09:05 AM EDT
The Securities and Exchange Commission today announced that St. Louis-based brokerage firm Edward Jones and the former head of its municipal underwriting desk have agreed to settle charges that they overcharged customers in new municipal bonds sales. It’s the SEC’s first case against an underwriter for pricing-related fraud in the primary market for municipal securities. The firm also was charged with separate misconduct related to supervisory failures in its review of certain secondary market municipal bond trades.
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 Stina R. 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 firm’s customers paid at least $4.6 million more than they should have for new bonds. In one instance, the misconduct resulted in an adverse federal tax determination for an issuer and put it at risk of losing valuable federal tax subsidies.
Edward Jones agreed to settle the case by paying more than $20 million, which 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. Wishman agreed to pay $15,000 and will be barred from working in the securities industry for at least two years.
“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 J. Ceresney, Director of the SEC Enforcement Division. “This enforcement action, which is the first of its kind, reflects our commitment to addressing abuses in all areas of the municipal bond market.”
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. “It is therefore important that firms have adequate supervisory systems to ensure that they are complying with their fair pricing obligations.”
Edward Jones consented to the SEC order without admitting or denying the findings that the firm willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933, Section 15B(c)(1) of the Securities Exchange Act of 1934, and Rules G-17, G-11(b) and (d), G-27, and G-30(a) of the Municipal Securities Rulemaking Board (MSRB). The firm also failed reasonably to supervise within the meaning of Section 15(b)(4)(E) of the Exchange Act. Edward Jones undertook a number of remedial efforts and now discloses the percentage and dollar amount of markups on all fixed income retail order trade confirmations in principal transactions.
Wishman consented to a separate SEC order without admitting or denying the findings that she willfully violated Sections 17(a)(3) of the Securities Act, MSRB Rules G-17, G-11(b) and (d), and G-30(a). She also was a cause of Edward Jones’ violations of Section 17(a)(2) of the Securities Act and Section 15B(c)(1) of the Exchange Act.
The SEC’s investigation, which is continuing, has been conducted by Municipal Securities and Public Pensions Unit members Kevin Guerrero, Ivonia K. Slade, Eric A. Celauro, Sally J. Hewitt, and Brian D. Fagel along with Joseph O. Chimienti, Jonathan Wilcox, and the unit’s deputy chief Mark R. Zehner. Providing assistance were members of the SEC’s National Exam Program, including Michael Fioribello, Paul N. Mensheha, and Stephen Vilim.
Statement on Edward D. Jones Enforcement Action
Commissioners Luis A. Aguilar, Daniel M. Gallagher, Kara M. Stein and Michael S. Piwowar
Aug. 13, 2015
The Commission’s recent enforcement action against Edward D. Jones involving the offer and sale of municipal bonds to retail investors highlights the need for clear rules requiring the disclosure of mark-ups and mark-downs. We encourage the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) to complete rules mandating transparency of mark-ups and mark-downs, even in riskless principal trades. If not, we believe the Commission should propose rules to address this important issue.
 See In the Matter of Edward D. Jones & Co., L.P., Exch. Act Rel. No. 75688 (Aug. 13, 2015) available at http://www.sec.gov/litigation/admin/2015/33-9889.pdf.