SEC Sanctions UBS Financial Services, Oppenheimer & Co., J.P. Morgan Securities, and 10 Others for Improper Sales of Puerto Rico Junk Bonds

The Securities and Exchange Commission recently sanctioned 13 firms for violating a rule intended to protect retail investors in the municipal securities market. The SEC found that the 13 dealers violated MSRB Rule G-15(f) by executing sales below the minimum denomination, as well as Section 15B(c)(1) of the Securities Exchange Act of 1934, which prohibits violations of any MSRB rule. The action stems from the SEC’s surveillance of trading in the municipal bond market, wherein 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 investigation then uncovered 66 occasions when dealer firms sold the Puerto Rico bonds to investors in amounts below $100,000. Accordingly, the SEC instituted administrative proceedings against the firms behind those improper sales: Charles Schwab & Co., Hapoalim Securities USA, Interactive Brokers LLC, Investment Professionals Inc., J.P. Morgan Securities, Lebenthal & Co., National Securities Corporation, Oppenheimer & Co., Riedl First Securities Co. of Kansas, Stifel Nicolaus & Co., TD Ameritrade, UBS Financial Services, and Wedbush Securities.

Without admitting or denying the findings, each of the firms agreed to be censured, and to review and revise their policies and procedures to ensure proper compliance with MSRB Rule G-15(f). The firms and their respective sanctions include:

Charles Schwab & Co. – $61,800 Hapoalim Securities USA – $54,000 Interactive Brokers LLC – $56,000 Investment Professionals Inc. – $67,800 J.P. Morgan Securities – $54,000 Lebenthal & Co. – $54,000 National Securities Corporation – $60,000 Oppenheimer & Co. – $61,200 Riedl First Securities Co. of Kansas – $130,000 Stifel Nicolaus & Co. – $60,000 TD Ameritrade – $100,800 UBS Financial Services – $56,400 Wedbush Securities Inc. – $67,200
“These actions demonstrate our commitment to rigorous enforcement of all types of violations in the municipal bond market,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement in an SEC statement. “We will act quickly and use all available tools to protect investors in municipal securities.”

Municipal bond offerings include a “minimum denomination,” which sets the minimum amount of the bonds that a firm may sell an investor in a single transaction. When bonds have a higher default risk, they are known as “junk bonds,” and may be inappropriate for retail investors. As a result, municipal issuers frequently set high minimum denomination amounts for junk bonds. The minimum threshold is intended to ensure that firms sell high-risk securities only to investors with the means to make sizeable investments and bear the higher risk, because retail investors typically purchase securities in amounts below the minimum requirement.

“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,” said LeeAnn G. Gaunt, Chief of the SEC’s Municipal Securities and Public Pensions Unit in an SEC statement.

If you invested in Puerto Rico debt, and have suffered investment losses, please contact Sonn Law Group to explore your legal options. Sonn Law Group is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies. To learn more, please call us at 844-689-5754 or complete our “contact form.”

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