2004-06-29

Bloomberg: NASD Fines UBS, Merrill, 6 Others in Muni Mark-Ups (update 6)

By Martin Z. Braun
NASD Fines UBS, Merrill, 6 Others in Muni Mark-ups (Update6) June 29 (Bloomberg) -- UBS AG, Merrill Lynch & Co. and six other firms were ordered to pay $610,000 in fines and restitution after securities regulators found investors received below-market prices for their municipal bonds. The National Association of Securities Dealers said the firms purchased bonds from customers that were later resold by other dealers at ``markedly higher prices,'' in violation of Municipal Securities Rulemaking Board rules. The rules require municipal bond dealers to deal fairly with customers and to buy and sell bonds at fair prices, the NASD said.

``The amounts (of the fines) don't seem much, but what is significant, I think, is that NASD is starting to look at the data and make judgments and enforce on that,'' said Kevin Olson, 43, a former trader who since 2000 sent reports on large price differences in the municipal market to regulators. The NASD also fined Charles Schwab & Co., Inc., Edward Jones & Co., First Trust Portfolios L.P. of Lisle, Illinois, Morgan Stanley, Prudential Financial Inc., and Wachovia Corp.

UBS spokeswoman Susan Austin said, ``UBS has implemented new procedures to meet the new regulatory guidelines and has already restored any clients accounts that were adversely affected.''

Wachovia spokeswoman Mary Eshet, Merrill spokesman Mark Herr, Morgan Stanley spokesman Mark Lake and Edward Jones spokeswoman Regina Deluca declined comment. First Trust Portfolios LP did not return a call seeking comment Jennifer Hallahan, a spokeswoman for Charles Schwab, said the firm ``supports the NASD's and the industry's efforts to enhance the municipal market's efficiency related to retail customer pricing.''

Fair Prices
Jim Gorman, a spokesman for Prudential said the firm cooperated fully with the NASD. ``We will comply with the order and we've already made restitution to our clients.''

The NASD inquiry, which took place from July 2002 to June 2003, focused on 60 different transactions worth $1.4 million at par value, and found that customers received prices that were below fair market value by 6.57 percent to 142.55 percent.

The customers lost $300,029.95 in the transactions, the NASD said. The smallest amount of bonds traded was $5,000 in par value and the largest lot traded was $200,000, the NASD said.

The securities firms were asked by customers to sell municipal bonds for them. The firms contacted a so-called ``broker's broker'' for a bid. The securities firm bought the bonds from the customer and resold them to the inter-dealer broker for ``a nominal gain,'' said the National Association of Securities Dealers.

`Reasonable Steps'
The NASD is examining the inter-dealer brokers' role in these transactions, and is looking at municipal bond transactions at other securities firms, said Barry Goldsmith, NASD executive vice president for enforcement. The investigations are all being done from the New Orleans office.

The firms, which did not admit or deny the NASD's findings, agreed to pay $310,000 in fines and $300,000 in restitution. UBS, the second-biggest underwriter of municipal debt last year after Citigroup Inc., will pay the most in fines and restitution, $200,666.

``Unlike a traditional mark-up case involving unfair profits to the dealer, these cases involve dealers who failed to take reasonable steps to obtain fair prices for their customers,'' said Mary Schapiro, NASD vice chairman and president of regulatory policy and oversight, in a statement.

``Dealers in municipal bonds are obligated to make requisite efforts to ensure that the transaction prices are reasonably related to market value, regardless of the amount of compensation they receive.'' NASD is an organization of brokers and dealers, supervised by the SEC, who trade securities in the U.S. The group regulates all over-the-counter brokers and dealers.

Here is a list of the firms, the fines and the restitution paid by the firms:

Firm	Fines	Restitution
Charles Schwab & Co, Inc.	$30,000	$30,869
Edward Jones	$15,000	$10,181
First Trust Portfolios L.P.	$60,000	$58,680
Merrill Lynch & Co.	$55,000	$54,527
Morgan Stanley DW Inc.	$20,000	$18,312
Prudential Equity Group, LLC	$10,000	$7,306
UBS Financial Services Inc.	$100,000	$100,666
Wachovia Securities, LLC.	$20,000	$19,486