church bonds

B. C. Ziegler and Company Sanctioned Over Allegations of False and Misleading Advertising

September 11, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm B. C. Ziegler and Company (B. C. Ziegler) and ordering the brokerage firm to pay $150,000 in connection with allegations that from January 1, 2009, through May 30, 2012 B. C. Ziegler failed to implement a supervisory system reasonably designed to ensure that material economic information regarding Church Bonds, including information concerning delinquent sinking fund payments, was disclosed to the firm’s brokers, trading desk, and customers, and was factored into the pricing of Church Bonds sold to customers in secondary market transactions. In addition, it was alleged that B. C. Ziegler used Church Bond sales material with customers that was not fair and balanced. The sales material prominently promoted the yields associated with Church Bonds without balancing the presentations by disclosing the risks. FINRA also alleged that B. C. Ziegler distributed unbalanced internal-use-only Church Bond sales material to its registered representatives, causing the firm to violate NASD Rule 2211(d)(1) and FINRA Rule 2010.

B. C. Ziegler has been a registered broker-dealer since 1948 and is a full service brokerage firm headquartered in Chicago, Illinois. A primary business of the firm is the underwriting and sale of fixed income products, including debt issued by religious institutions known as “Church Bonds” and senior living facilities (Senior Living Bonds). The firm has approximately 22 branch offices and 200 registered representatives.

According to FINRA, B. C. Ziegler specializes in underwriting and selling Church Bonds for religious institutions. Church Bonds are generally issued by nonprofit religious entities and as such are exempt from registration as a security with the SEC. While there is no established secondary market for Church Bonds, FINRA found that B. C. Ziegler frequently facilitated secondary trading among its customers for Church Bonds it underwrote. A Church Bond sinking fund is a pool of money funded with periodic payments by an issuer for the purpose of accumulating money to make annual or semi-annual coupon payments due to investors of Church Bonds. A Church Bond issuer behind on its sinking fund payments is not in strict compliance with its trust indenture and may be a sign of an issuer’s financial distress.

FINRA Alleges Royal Securities Company Failed to Supervise the Sale of Church Investments – Part II

March 6, 2014 | by Staff Attorney

This article continues the findings of The Financial Industry Regulatory Authority (FINRA) that led to sanctions against Royal Securities Company (Royal Securities) concerning allegations Royal lacked adequate supervision and controls in several areas. FINRA found that from 2009 through 2011, Royal Securities failed to establish adequate supervisory systems to ensure due diligence, training, and fair pricing of church bonds and funds sold by its representatives.

FINRA alleged that Royal Securities acted as the lead underwriter for three churches who were issuing church bonds. From May 2009, through October 2011, according to FINRA Royal Securities sold approximately $4.3 million in church bonds to customers. FINRA also found that Royal Securities was also involved in the sale of secured certificates of participation in a fund that raised capital for Christian churches. The church fund was sold primarily by another broker-dealer but FINRA found that Royal Securities had a secondary clearing arrangement with the broker-dealer where 151 church fund sales occurred in 65 accounts with a total of approximately $2,908,000 in sales.

FINRA found that Royal Securities failed to adopt reasonable written supervisory procedures and supervisory controls to govern church bonds and church funds lines of business. Specifically, FINRA found that Royal Securities procedures did not address specific suitability considerations, particularly supervision of issues, or any required due diligence of church bonds underwritten.

Rive, Leavell & Co. Sanctioned Over Misleading Communications In the Sale of Church Bonds

January 22, 2014 | by Staff Attorney

Brokerage firm Rives, Leavell & Co. (Rives) was recently sanctioned by the the Financial Industry Regulatory Authority (FINRA) over allegations that the firm disseminated to the investing public 29 advertisements including newspapers, brochures, offering documents, and pastor letters related to church bond investments that failed to comply with FINRA’s advertising rules. FINRA determined that these communications generally failed to adequately explain or highlight the risks associated with the investments, contained misleading language, or failed to explain investment terms sufficiently.

Rives is a broker-dealer based in Jackson. Mississippi, employs twelve registered brokers and has no branch office locations. NASD Conduct Rule 2210(d)(1) establishes content standards for public communications. All member communications with the public are to be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or service. Further, FINRA prohibits members from omitting any material fact. In addition, NASD Rule 2210(d)(1)(B) prohibits claims that are false, exaggerated, unwarranted or misleading. FINRA has reminded firms that members must consider the nature of the audience to which the communications will be directed and that different levels of explanation or detail may be necessary depending on the audience to which a communication is directed.

During the first review period FINRA examined, the agency found that Rives disseminated two newspaper advertisements, five brochures, one pastor letter, one mailed advertisement, and two offering documents that contained improper content. For example, FINRA found that a number of the communications promoted the bonds’ high interest rates but failed to disclose various risks associated with the investment including that the bonds were unrated by a rating agency, were potentially illiquid and might result in a loss of principal. The communications also failed to explain and contrast the difference between different interest options on the bonds.

Capstone Asset Planning Company Fined Over Misleading Church Bond Mutual Fund Disclosures

October 19, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Capstone Asset Planning Company (CAPCO) alleging that from 2010 through 2012, CAPCO distributed communications to the public concerning the Capstone Fund that failed to accurately reflect the change in the fund’s performance. In addition, FINRA alleged that the Capstone Fund’s website contained a misleading statement concerning the fund’s redemption policy and compared church bonds to corporate bonds without disclosing the material differences between them. As a result, FINRA found that CAPCO violated the content and communications standards under Rules 2210(d)(1)(A), 2210(d)(2)(B), and 2210(d)(2)(B).

CAPCO is a brokerage firm with one office in Houston, Texas, and 22 registered representatives. CAPCO is a mutual fund underwriter and is a subsidiary of Capstone Financial Services, Inc. CAPCO served as the principal underwriter and distributor of shares of the Capstone Church Capital Fund (Capstone Fund). Capstone Fund’s holdings were approximately 87% church mortgage bonds and 13% church mortgage loans. From 2009 to 2012, the net assets of the Capstone Fund declined as a result of the decrease in the fair value of the fund’s assets. The Capstone Fund stopped accepting sales on January 24, 2013.

Under NASD Rule 2210(d)(1)(A) communications must be “based on principles of fair dealing and good faith,” “fair and balanced,” and must “provide a sound basis for evaluating the facts in regard to any particular security.” Similarly, NASD Rule 2210(d)(1)(B) prohibits members from making “false, exaggerated, unwarranted or misleading statement or claim in connection with any communication.”