WSJ: Eight Wall Street Firms to Settle Probe of Municipal-Bond Pricing

By AARON LUCCHETTI
Staff Reporter of THE WALL STREET JOURNAL
June 29, 2004 1:08 p.m.

The NASD plans to announce a settlement today with eight Wall Street firms over allegations the companies overcharged investors in the buying and selling of municipal bonds.

The firms paying the fines are Merrill Lynch & Co., Charles Schwab & Co., Edward Jones, Morgan Stanley, Prudential Equity Group, UBS Financial Services Inc., Wachovia Securities LLC and First Trust Portfolios LP. The firms, which will pay a total of $310,000 in fines and $300,000 in restitution to investors, neither admitted nor denied the allegations.

The NASD, a self-regulatory organization overseeing brokerage firms, still has about a dozen investigations continuing into the bond market, most or all involving corporate bonds -- a market less dominated by individual investors.

The $2 trillion municipal-bond market is a haven for individual investors, mostly because of the tax benefits they provide. But in recent years, the market has come under scrutiny from regulators and critics who said it didn't have enough price transparency. They said prices investors paid when buying and selling bonds differed widely on the same day, even when there was no major news or market activity.

In the cases being settled, the NASD found that some investors who were customers of the eight firms received below-market prices when selling their municipal bonds. The bonds, after being sold by investors, were then resold by other dealers often the same day at significantly higher prices, the NASD alleged.

The NASD alleged the transactions violated two rules of the Municipal Securities Rulemaking Board, which require brokerage firms to deal fairly with their customers and to buy and sell bonds at fair prices. The NASD said some of the brokerage firms made their pricing decisions solely based on price quotes from broker intermediaries known as interdealer brokers. The NASD is still investigating the conduct of interdealer brokers involved in the transactions.

The cases come as lawmakers and regulators increase their scrutiny of the bond market, especially in corporate and municipal bonds. The Securities and Exchange Commission recently opened an investigation into conduct of auctions in the $200 billion auction-rate debt market.