This post picks up on our first article on The Financial Industry Regulatory Authority (FINRA) sanctioning brokerage firm B. C. Ziegler and Company (B. C. Ziegler) and ordering the brokerage firm to pay $150,000 on allegations that the firm failed to implement a supervisory system reasonably designed to ensure that material economic information regarding Church Bonds was disclosed to the firm’s brokers, trading desk, and customers.
FINRA found that while the firm maintained a Credit Watch List to check for delinquent and missed Church Bond payments, this list was only produced periodically and not every time a Church Bond issuer fell five weeks behind on its sinking fund payments. Accordingly, FINRA found that B. C. Ziegler violated NASD Rule 3010 by failing to establish and maintain a supervisory system reasonably designed to ensure that material economic information, such as delinquent sinking fund payments, was disclosed to the firm’s brokers and customers who were sold Church Bonds in secondary market transactions.
FINRA found that prior to September 2010, B. C. Ziegler did not inform its brokers, trading desk, or customers when an issuer was more than 30 days behind on its sinking fund payments, an indicator of financial distress. Further, it was alleged that from September 2010, through at least May 2012, B. C. Ziegler’s registered representatives and trading desk were informed only periodically when a Church Bond issuer fell five weeks behind on its sinking fund payments through the Credit Watch List causing B.C. Ziegler’s supervisory system to not be reasonably designed to consider material economic information in the pricing of Church Bonds in secondary market transactions. The result, FINRA found, was that the firm had similar pricing for secondary market trades in Church Bonds that were current and delinquent with sinking fund payments.
In addition, under NASD Rule 2210(d)(1)(A) communications must be based on principles of fair dealing and good faith and must also be “fair and balanced,” with a sound basis for evaluating the facts in regard to any particular security. These disclosure requirements prohibit members from omitting any material fact if the omission would cause the communications to be misleading.
FINRA found that B. C. Ziegler violated its rules by using 59 pieces of sales material that were not fair and balanced and did not provide a sound basis for evaluating the facts in regard to purchases of Church Bonds. FIRNA found that the sales material generally promoted Church Bond new issues and the bonds’ yields without a fair and balanced presentation of the risks posed by the bonds. Instead, FINRA found that the risk disclosures were generic and in small print legends at the bottom of the page, and did not prominently disclose the risks of potential default and/or loss of principal, that the bonds were not rated and the bonds’ illiquidity resulting from the lack of a secondary market.
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