Reuters: Dealers settle muni charges for $610,000

Tuesday June 29, 5:44 pm ET
By Christina Ling

WASHINGTON, June 29 (Reuters) - Eight major brokerage firms will pay more than $610,000 in the biggest municipal bond market settlement to date involving charges of unfair pricing, the National Association of Securities Dealers said on Tuesday.

The NASD alleged Charles Schwab (NYSE:SCH - News), Edward Jones, First Trust Portfolios, Merrill Lynch (NYSE:MER - News), Morgan Stanley (NYSE:MWD - News), Prudential Equity Group, UBS Financial Services (UBSN.VX), and Wachovia (NYSE:WB - News) had all paid clients below market price for their municipal bonds.

The case is unusual because most enforcement cases the NASD has brought in the municipal bond market involve excessive price markups.

"In terms of these kinds of pricing violations I believe they're the first," NASD's New Orleans regional chief counsel for enforcement Andy Favret told Reuters.

"They're certainly the largest ... in terms of pricing violations in the muni market," he added, saying they also involved the largest number of firms to date.

In agreeing to the settlement, the firms neither admitted nor denied the NASD's allegations.

UBS spokeswoman Susan Austin said, "As a result of recommendations made by regulators earlier this year, UBS has implemented new procedures to meet the new regulatory guidelines and has already restored any client accounts that were adversely affected."

Jim Gorman, a Prudential spokesman, said, "We cooperated fully with the NASD. We will comply with the order and we have already paid restitution to our clients."

Schwab spokeswoman Jennifer Hallahan said: "Schwab works to execute its fixed income customer orders at the best price it can find in the marketplace."

Representatives for First Trust and Morgan Stanley were not immediately available for comment. Merrill Lynch, Wachovia and Edward Jones declined to comment.

MAJOR PRICE DISPARITIES
The cases emerged from scrutiny of daily trade data collected and published for the market by the Municipal Securities Rulemaking Board.

The board said in January it had found major price disparities that would be investigated, and warned dealers to take their fair pricing obligations to their clients.

"We established the (price) data collection system not only for transparency but for surveillance," MSRB Director Christopher Taylor said in an interview. "We set high standards for dealers and we expect everyone to abide by them."

NASD concluded the brokerages had paid their customers below market rate based on subsequent trade in the bonds at higher prices. Municipal market rules require dealers to ensure their clients receive a fair price for their bonds.

The brokerages in question used a common practice of contacting a "brokers' broker" to seek bids from other dealers for the customers' bonds.

In such deals, the dealer sells the customer's bonds to the broker's broker, who in turn sells them on to the firm that had expressed an interest in buying them.

But the NASD found that in subsequent trading, the bonds changed hands at higher prices than the customer received.

The NASD said the brokerages had breached their duty to clients by relying solely on prices provided by the brokers' broker to determine the fair market value of the bonds.

NASD said it had more investigations into similar practices under way, and was also probing the brokers' brokers involved in the deals.

Kevin Olson, a former muni bond trader and proprietor of MunicipalBonds.com, a Web site dedicated to exposing excessive markups in the muni market, welcomed Tuesday's settlement.

"This is an important first step," Olson said, saying individual investors and state regulators were also becoming more sensitive to the potential of excessive markups in the opaque muni market.