WASHINGTON – Federal regulators have fined 13 brokerage firms, including Charles Schwab, JPMorgan Securities and TD Ameritrade, accusing them of failing to protect retail investors in sales of high-risk bonds issued by Puerto Rico’s debt-strapped government.
The Securities and Exchange Commission announced the penalties Monday. The amounts are small, from $54,000 against Hapoalim Securities USA to $130,000 for Riedl First Securities of Kansas.
But they are significant because they represent the SEC’s first actions under a rule establishing the smallest amount of municipal bonds that brokerages can sell an investor in a single transaction. Retail investors usually buy securities in smaller amounts, so the rule is designed to ensure that high-risk “junk” bonds are sold only to investors who can purchase bigger quantities and shoulder greater risk.
The SEC said it found 66 cases in which firms sold bonds in amounts below the $100,000 minimum set for a $3.5 billion sale this year of Puerto Rican government bonds.
The 13 firms neither admitted nor denied wrongdoing under the settlement. They were censured by the SEC, bringing the possibility of a stiffer sanction if the alleged violation is repeated. In addition, the firms agreed to review their policies and procedures and make necessary changes to keep them in compliance with the rule on minimum amounts.
Puerto Rico, with a shrinking population and economy, is struggling with $73 billion in public debt accumulated over several decades. The U.S. island territory of 3.67 million people is in its eighth year of recession and bears a 13.5 per cent unemployment rate.
In February, credit-rating agency Moody’s Investors Service downgraded Puerto Rico’s debt to junk status. That came a few days after agency Standard & Poor’s downgraded the island’s debt by one notch, prompting the local government to file new legislation aimed at shoring up the economy as it prepared to re-enter the bond market.
Puerto Rico’s government this year has managed its first balanced budget in more than a decade, sales-tax revenues are up and the publicly-owned power company has won breathing room to pay its debts. The developments have bought some time for Puerto Rico to stave off an economic crisis, but it may only be for a while. As the island has tried to pay off its heavy debt by selling bonds, some investors who are critical to keeping the bonds afloat are wary.
The prolonged recession has sent businesses and people fleeing to the mainland U.S. and spooked the investors holding billions of dollars of Puerto Rico’s debt. That has sharply raised the cost of government borrowing and lowered the value of the bonds it has issued.
In addition to Hapoalim Securities and Riedl First Securities, the firms and the amounts they were fined: Charles Schwab & Co., $61,800; Interactive Brokers LLC, $56,000; Investment Professionals Inc., $67,800; JPMorgan Securities, $54,000; Lebenthal & Co., $54,000; National Securities Corp., $60,000; Oppenheimer & Co., $61,200; Stifel Nicolaus & Co., $60,000; TD Ameritrade, $100,800; UBS Financial Services, $56,400; and Wedbush Securities Inc., $67,200.