The Financial Industry Regulatory Authority (FINRA) recently censured and fined Edward Jones $200,000 for misrepresenting customers’ taxable interest as tax-exempt and failing to adequately monitor its supervisory systems meant to address short positions in municipal bonds. Also, FINRA fined New York based Stoever, Glass & Compay, Inc. $40,000 for its part in selling municipal securities below the minimum denominations set forth in bond documents.
Allegedly, between June 2009 and December 2014, Edward Jones inaccurately represented to its customers that at least $129,624 in interest the firm paid in short positions of municipal bonds was tax-exempt. FINRA found that Edward Jones had 244 short positions, mainly from trading errors, some of which were not covered for more than a year. Short positions occur when firms sell bonds that they do not own. The dealer that executes the short sale must then go to the market and subsequently purchase the securities from a third party in order to deliver on the transaction. When a short position corresponds to a customer’s “long” position, the dealer makes a substitute interest payment to the customer. However, because the firm is paying the interest, the customer must pay taxes on that money. Edward Jones agreed to reimburse any affected customers for costs from tax liabilities or amending tax filings. FINRA brought similar actions against firms over short periods in the past, including Morgan Stanley, UBS and Oppenheimer & Co., recently.
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