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SEC Fines 13 Brokerage Firms Over Puerto Rico Junk Bonds - Analyst Blog

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On Monday, the Securities and Exchange Commission (SEC) penalized 13 brokerage firms for violation of a rule sanctioned for the protection of retail investors in the municipal securities market. The fines range from $54,000 to $130,000.

Puerto Rico debt has a stronghold on municipal bond portfolios, driven by its triple tax exemption policy. However, these bonds have been under pressure over the past few years over its $70 billion debt. In February, Puerto Rico's debt was downgraded to junk status by credit-rating agency Moody's Investors Service, the credit rating arm of Moody's Corp. ( MCO ).

Therefore, Puerto Rico has tried to pay off debt by selling bonds and notably, the US Commonwealth is one of the largest issuers of municipal debt.

According to the rule, municipal bond issuers are permitted to issue bonds in a "minimum denomination" set by the regulators for a single transaction under which brokerages sell bonds to investors. Such a standard small amount helps the issuers to sell such high risk securities only to those retail investors who are competent enough to bear the higher risk. However, issuers of such bonds at times set high minimum denomination amounts for such high default risk junk bonds, making investment difficult for retail investors who prefer to buy in small amounts.

On the SEC's inquiry over trading in the municipal bond market, it was detected that in $3.5 billion offering of junk bonds by the Commonwealth of Puerto Rico earlier this year, a number of inappropriate sales were conducted violating the established rule. On further investigation, 66 such transactions were detected in which dealers have sold Puerto Rico bonds to investors below the standard minimum denomination, which was set at $100,000 for such bonds.

The penalized firms, which neither admitted nor denied wrongdoings include Hapoalim Securities, Riedl First Securities, The Charles Schwab Corporation ( SCHW ), Interactive Brokers LLC, a subsidiary of Interactive Brokers Group, Inc. ( IBKR ), Investment Professionals Inc., JPMorgan Securities, a unit of JPMorgan Chase & Co. ( JPM ), Lebenthal & Co., National Securities Corp., Oppenheimer & Co., a subsidiary of Oppenheimer Holdings Inc. ( OPY ), Stifel Nicolaus & Co., TD Ameritrade Holding Corporation ( AMTD ), UBS Financial Services, a unit of UBS AG ( UBS ) and Wedbush Securities Inc.

Further, the SEC condemned such firms to face stricter actions on repeated violation of the rule. Additionally, these firms have ensured that they will evaluate their policies and procedures to comply with the rule.

For these firms, the above-mentioned allegation is an additional burden to their ongoing legal problems. Further, firms across the globe have been facing increasing scrutiny for their business practices. Many of the firms have paid billions of dollars as fines and compensation to settle lawsuits and probes. Many investors have suffered as a result of such business malpractices. These settlements will help restore their confidence in law-enforcement agencies.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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