Oppenheimer & Co., Inc., of New York, New York, was censured and fined $225,000 by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm failed have adequate supervisory procedures to address short positions in tax-exempt municipal bonds that resulted primarily from trading errors and which resulted in inaccurate representations to Oppenheimer’s clients. Letter of Acceptance, Waiver and Consent, No. (Dec. 22, 2015).
According to the AWC, from January 1, 2009 through September 20, 2014, the firm had failed to reasonably supervise and have an adequate supervisory system, which included adequate written supervisory procedures, which would address short positions in tax-exempt municipal bonds.
Municipal bonds typically pay tax-exempt interest on a semi-annual basis. According to the AWC, the interest which is received via the municipal issuer is exempt from federal income tax; and any substitute interest paid by a firm on a short position is taxable. If a firm is short a tax-free municipal bond that corresponds to a customer long position, the firm will pay the customer applicable interest.
The AWC indicated that during the relevant period, Oppenheimer held an estimated eighty-five short positions in tax-exempt municipal securities which corresponded to long positions in customer accounts. The AWC stated that the short positions resulted from trading and operational errors. In the circumstances here, Oppenheimer paid the interest to customers and the interest was taxable.
The AWC indicated that the majority of the firm’s municipal short positions had occurred through the firm’s retail branches or through the firm’s trading accounts. In 2013, Oppenheimer had recognized that short positions were not being covered in a timely fashion and subsequently revised its procedures to reduce the number of aged short positions. Notwithstanding, during the relevant period, the firm often did not cover municipal short positions for a month or more, and some of the short positions were not covered for more than a year. The firm’s trading departments and branch offices were reportedly responsible for covering short positions in municipal bonds in their respective trading and error accounts, and the firm’s dividend department was responsible for crediting interest payments to customer accounts.
The AWC additionally stated that in 2013, FINRA’s examination staff had found that the firm had inaccurately reported firm-paid interest from short municipal bond positions to customers on Forms 1099 and accounts statements. The firm also reportedly failed to maintain records identifying particular customer accounts that offset municipal bond positions. FINRA ultimately found that by mischaracterizing at least $188,974.38 in interest paid by the firm to customers as exempt from tax, Oppenheimer had violated MSRB Rule G-27 – a rule which requires each broker, dealer, and municipal securities dealer to supervise conduct of their municipal securities activities and ensure compliance with MSRB Rules and Securities Exchange Act of 1394.
FINRA further found that due to the firm inaccurately representing to customers that the interest customers were receiving was tax exempt, and failure to disclose that the interest they were received was not entitled to tax exempt status, that Oppenheimer violated MSRB Rule G-17 – a rule which provides that in the conduct of its municipal securities activities, each broker, dealer, and municipal securities dealer shall deal fairly with all persons and shall not engage in deceptive, dishonest, or unfair practice.
Finally, FINRA found that due to the firm sending account statements to customers which inaccurately stated that customers were receiving tax-exempt income, the firm violated MSRB Rule G-8 – a rule which requires municipal dealers to make and keep current books and records, including account statements that they chose to send to their customers.
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