Five Major Firms Sanctioned By FINRA

Financial Industry Regulatory Authority (FINRA) has announced sanctions against five firms – Citigroup Global Markets, Inc.,; Goldman, Sachs & Co.; J.P. Morgan Securities LLC; Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC – for using municipal and state bond funds to pay lobbyists.

Basically, these firms charged municipal and state bond taxpayers for their membership in a lobbying group – Cal PSA – without disclosing that these fees were unrelated to the bond offerings. These costs are not considered to have a direct relationship to the bond offerings charged and thus were not underwriting expenses. Cal PSA (The California Public Securities Association) engages in a variety of political activities including lobbying on behalf of companies seeking to influence California state government.

The firms, as usual, while consenting to the findings did not have to admit or deny guilt. And the $4.5 million to be paid in fines and restitution will hardly impact the firms’ financial condition.

For the public, it’s another case of banking and securities firms supporting a group which, according to its website, is “a unified association for the public securities industry to achieve its objectives” (which in no small part means helping/encouraging governments to issue more bonds, and even helping to fund bond authorization campaigns) – and then secretly getting the public to pay for the cost.

In addition, such activities often lead to bond mispricing which further enriches the firms and their investors at the expense of the public.

FINRA, which is not well known by the public, is a major regulatory agency for securities firms doing business in the U.S. From its website it “is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms.” More information is available here.

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