The Financial Industry Regulatory Authority (FINRA) says that it is ordering Santander Securities LLC (Santander) to pay $6.4M for supervisory failures involving the sale of Puerto Rico Municipal Bonds and Puerto Rico closed-end funds. Of the payment to FINRA, $2 million is a fine and censure and over $4.3 million is customer restitution.
The restitution will go toward certain customers who were solicited to buy the municipal bonds. Santander will pay $121,000 and make rescission offers to repurchase the securities from certain customers that were affected by the firm’s purported failure to supervise employees while they were trading.
FINRA said that between December 2012 and October 2013, Santander failed to make sure that its proprietary product risk-classification tool accurately reflected the risks of investing in Puerto Rico bonds. The regulator contends that the systems and procedures that were in place at Santander did not mandate an evaluation or review of this tool, which is what its representatives used when recommending financial products to customers.
For example, said FINRA, when “significant market events” occurred, such as when credit rating agency Moody’s downgraded a number of Puerto Rico bonds-including Puerto Rico General Obligation bonds-to a level just above junk, Santander did not re-examine the tool’s risk classifications for the bonds. Instead, one day after the credit rating agency issued its ratings downgrade, the firm stopped buying the municipal bonds that its customers in Puerto Rico wanted to sell and ramped up its efforts to lower the firm’s own Puerto Rico municipal bond inventory.
In the agreement, Santander is accused of failing to properly supervise the way customers were using concentrated and margin positions in their accounts. Also, said FINRA, Santander lacked the procedures and systems to make sure that accounts with a substantial amount of Puerto Rico bonds could be reviewed comprehensively to assess whether new purchases were appropriate considering existing positions.
FINRA said that employees in Santander’s Puerto Rico office were not supervised in a reasonable enough manner to mitigate potential conflicts, such as when customer orders were filled via positions held in its own brokers accounts. As a result, said FINRA, about 400 such transactions occurred without detection.
By settling, Santander is not denying or admitting the FINRA charges. A spokesperson for Santander said that the firm would comply with the terms of the settlement and it has since “enhanced its controls” related to the activities in question.
At Shepherd Smith Edwards and Kantas, Ltd, LLP, our Puerto Rico bond fraud lawyers and our Puerto Rico closed-end fund fraud lawyers are working with investors in the Commonwealth and on the mainland to recoup their losses related to investing in these funds. Many investors lost much of their savings when Puerto Rico bonds and funds began to fail dramatically two years ago. We are pursuing FINRA arbitration claims on our clients’ behalf against Santander, UBS (UBS), Banco Popular, and other brokerage firms.
Finra Fines Santander Unit Over Puerto Rico Bond Sale, Wall Street Journal, October 13, 2015
Santander Securities Slammed by FINRA Over Puerto Rican Muni Bond Sales, ThinkAdvisor, October 13, 2015