Edward Jones Fined for Overcharging Customers
The Securities and Exchange Commission (“SEC”) announced that it has reached a settlement with Edward D. Jones & Co. (“Edward Jones”) and the former head of its municipal syndicate desk. The allegations concern the pricing of municipal securities in the primary market. Edward Jones is a retail-oriented broker dealer headquartered in St. Louis, Missouri. It is also an underwriting co-managing syndicate member for new issue negotiated municipal securities. The SEC alleged that the firm failed to make bona fide public offerings of new issue municipal bonds at initial offering prices. The SEC’s press release said it is the agency’s first case against an underwriter for fraud relating to the pricing of municipal bonds in the primary market.
In a primary market transaction, one or more municipal securities underwriters purchase newly issued securities from the issuing municipality and sell the securities to investors. The initial offering price is the price negotiated with the issuer of the bonds. At the time of the original issuance of the bonds, municipal bond underwriters are required to offer new issue bonds to their customers at the initial offering price. This type of transaction may also be referred to as a new issue transaction.
In a secondary market transaction, municipal bond dealers provide quotes to other broker dealers on the bonds that they deal in. A municipal bond quote consists of a bid (the price at which the dealer is willing to purchase the securities) and an offer (the price at which the dealer is willing to sell the securities.) Secondary market purchasers of municipal bonds may pay a mark-up on the bonds. It is the equivalent of the broker dealer buying the bonds at wholesale prices and selling them to their customers at retail prices. Securities rules do not require broker dealers to disclose the markups on municipal bond transactions.
According to the SEC, in 75 primary market offerings between 2009 and 2012, Edward Jones charged purchasers of new issue bonds higher prices than the initial offering prices resulting in an overpayment to Edward Jones of more than $4.6 million. Edward Jones has agreed to pay $20 million, including $5.2 million in restitution to the affected bond purchasers, to settle the SEC’s charges. The former head of Edward Jones’ municipal syndicate desk agreed to pay $15,000 and accepted a two-year bar from working in the securities industry.