FINRA Sanctions Brokerage Firm Santander Securities $6.4 Million Over Puerto Rico Bond Fund Supervisory Failures
A recent press release by The Financial Industry Regulatory Authority (FINRA) announced that the regulator has ordered Santander Securities LLC (Santander) to pay approximately $4.3 million in restitution to customers who were solicited to purchase Puerto Rican Municipal Bonds (PRMBs). Further, FINRA stated that Santander will pay restitution of $121,000 and offer rescission to buy back the securities sold to certain customers that were impacted by supervisory failures related to employee trading. Finally, FINRA also fined Santander $2 million for supervisory failures related to the firm’s sales of PRMBs, Puerto Rican closed-end funds, and for employee trading.
The recent sanctions comes on the heals of The Securities and Exchange Commission (SEC) and FINRA fines of UBS Financial Services Inc. of Puerto Rico (UBS) the resulted in a combined fine of $34 million over Puerto Rico bond fund sales tactics and supervision. In the case of UBS, the SEC issued a press release announcing that it sanctioned UBS and a former branch manager for failing to supervise a former broker who had customers invest in UBS mutual funds (UBS Funds) using money borrowed from a UBS affiliated bank. In FINRA’s UBS press release, the agency announced that it fined UBS $7.5 million for supervisory failures related to the suitability of transactions in the firm’s Puerto Rican closed-end fund shares. In addition, FINRA ordered UBS to pay approximately $11 million in restitution to 165 customers who realized losses on their UBS Fund positions.
In Santander’s case, FINRA found that between December 2012 and October 2013, Santander did not ensure that its proprietary product risk-classification tool accurately reflected market risks of investing in Puerto Rico debt. In addition, FINRA alleged that Santander failed to adequately supervise its customers' use of margin and concentrated Puerto Rico positions in their accounts. For instance, FINRA found that the firm's systems and procedures did not require a review of its product risk-classification tool to determine whether changes in risks of investing in Puerto Rico debt was warranted. FINRA found that following significant market events such as the December 13, 2012, Moody's downgrade of certain Puerto Rico bonds to one level above junk, Santander stopped purchasing Puerto Rico debt that its Puerto Rican customers wanted to sell and accelerated its efforts to reduce the firm's inventory of Puerto Rico debt. It was during this period, that FINRA found that Santander did not have systems in place to ensure a review of accounts with significant concentration in Puerto Rican bonds and closed-end funds to determine whether new purchases were suitable in light of existing positions.
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