Finra fines banks $4.48 million for lobbying fees reimbursed via municipal, state bond offerings

By Toni Weeks

San Diego, Dec. 27 - The Financial Industry Regulatory Authority (Finra) said it has sanctioned five firms a total of more than $4.48 million for unfairly obtaining reimbursement of fees paid to lobbying group California Public Securities Association (Cal PSA), which violated the fair dealing and supervisory rules of the Municipal Securities Rulemaking Board.

According to a press release, Finra found that the firms made payments between January 2006 and December 2010 to Cal PSA, an association that engages in political activities including lobbying on behalf of companies seeking to influence California state government. The firms requested that the voluntary payments be reimbursed as underwriting expenses from the proceeds of the negotiated municipal and state bond offerings.

Of the $4.48 million in sanctions, $3.35 million represents fines, and $1.13 million will provide restitution to certain issuers in California.

The affected companies and their fines are as follows:

• Citigroup, with an $888,000 fine and $391,106 in restitution;

• Goldman Sachs, with a $568,000 fine and $115,997 in restitution;

• JPMorgan, with a $465,700 fine and $166,676 in restitution;

• Merrill Lynch, with a $787,000 fine and $287,200 in restitution; and

• Morgan Stanley, with a $647,700 fine and $170,054 in restitution.

Because Cal PSA's activities did not bear a direct relationship to the bond offerings and the payments were not underwriting expenses, the reimbursement was unfair, the release said. In addition, the firms did not adequately disclose the nature of the fees to issuers and failed to establish reasonable procedures in this area. Furthermore, Finra found that the companies, other than JPMorgan, failed to have adequate systems and written supervisory procedures designed to monitor how the municipal securities associations used the funds the firms paid.

"Issuers are entitled to know what they are paying for and why," Finra executive vice president and chief of enforcement Brad Bennett said in the release. "It was unfair for these underwriters to pass along the costs of their Cal PSA membership to the municipal and state bond taxpayers, neglecting to disclose that these costs were unrelated to the bond deals."

The firms neither admitted nor denied the charges but consented to Finra's findings.

Finra's Carrie Dunican and Kristina Juntunen conducted the investigated under the supervision of Gina Petrocelli and Susan Light. Malcolm Northan and Cynthia Friedlander assisted.

Washington, D.C.-based Finra is the largest independent regulator for all securities firms doing business in the United States.

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