(Adds Oppenheimer and Stifel declined to comment)
By Lisa Lambert and Sarah N. Lynch
WASHINGTON, Nov 3 (Reuters) - Units of 13 major Wall Street firms, including JPMorgan and UBS, improperly sold bonds from Puerto Rico’s landmark March junk deal to retail investors who may not have understood the debt’s riskiness, the U.S. Securities and Exchange Commission said on Monday.
The firms will pay penalties ranging from $54,000 to $130,000, without admitting or denying the regulator’s charges that they violated a new rule on minimum denominations for municipal bond sales. This is the first time the SEC has brought a case based on the rule, which prohibits dealers from selling bonds to individual buyers below a certain threshold amount.
“These firms violated a straightforward investor protection rule that prohibits the sale of muni bonds in increments below a specified minimum,” said LeeAnn Gaunt, chief of the SEC’s municipal securities and public pensions unit, in a statement. “We conduct frequent surveillance of trading in the municipal bond market and will penalize abuses that threaten retail investors.”
The $3.5 billion deal in March, the largest municipal junk bond sale in U.S. history, included limits meant to ensure smaller investors were not caught holding the risky debt unawares.
Specifically, there was a high minimum denomination of $100,000 for a purchase, which carried over when the bonds were traded in the secondary market. The SEC said it found 66 occasions when dealers sold the bonds to investors below that threshold.
There was high demand for the debt, which came with a rich 8 percent coupon, from hedge funds and other institutions. Still, less than two weeks after the issuance the Financial Industry Regulatory Authority (FINRA), which also oversees the $3.7 trillion municipal market, began inquiring into possible trades involving retail buyers. FINRA would not comment on the SEC charges.
Units of Charles Schwab, Interactive Brokers , Investment Professionals, Lebenthal & Co, National Securities Corporation, Oppenheimer & Co, Riedl First Securities Co of Kansas, Stifel Nicolaus & Co, TD Ameritrade, and Wedbush Securities were also charged.
A spokesperson for Charles Schwab said the firm “was included in today’s settlement related to four unsolicited trades that were made under the $100,000 regulatory threshold. When we were alerted to those trades, they were canceled.”
Representatives from J.P. Morgan, Lebenthal, Riedl, Stifel Nicolaus and Oppenheimer declined to comment, and a spokesperson from TD Ameritrade said it fully cooperated with the SEC. Others were not immediately available.
Over the last year, the territory has come under increasing scrutiny from regulators and investors alike as it tries to address major economic and financial deterioration. It will soon embark on $2.9 billion in financing to help shore up its struggling highway authority while also overhauling its tax system.
Separately, UBS has entered a $5.2 million settlement with Puerto Rico’s financial regulator stemming from sales of Puerto Rico’s closed-end bond funds with investors. A UBS client on Friday sued the regulator to make documents related to the case public. (Additional reporting by Suzanne Barlyn in New York; Editing by Eric Beech, Chizu Nomiyama and Lisa Shumaker)