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.
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