FINRA fines two firms, one for failing to oversee political contributions

The Financial Industry Regulatory Authority this week censured and fined two firms for municipal market violations, including failing to properly supervise political contributions from muni finance professionals.

Alabama-based municipal underwriter Frazer Lanier Company, Inc. received a censure, agreed to pay a $125,000 fine and put in place a supervisory system that ensures compliance with MSRB Rule G-27 on supervisory procedure.

Frazer Lanier settled without admitting or denying the allegations, as is typical.

Acting on a regulatory tip, FINRA said the firm, which has been a muni dealer since 1976, violated Rule G-27 by failing to establish, maintain, and enforce certain supervisory system and procedures. The violations date back to January 2018, FINRA said.

A provision of the MSRB rule prohibits brokers, dealers, and municipal securities dealers from engaging in municipal securities business with a municipal entity within two years of the dealer, an municipal finance professional of the dealer, or a related political action committee making a political contribution to an official of the municipal entity with dealer-selection influence.

As a result of the lack of a supervisory system and procedures, Frazer Lanier failed to detect a $500 political contribution by a firm professional in May 2018 from a joint checking account, FINRA said. The professional reported the contribution as two separate $250 contributions, exceeding the rule's de minimis exception.

Frazer was also dinged for failing to maintain proper supervisory or written procedures for political action committee-related activity. From 2018 through the present, Frazer Lanier was a dues-paying member of a non-profit organization that contributed to and endorsed political candidates through the organization's affiliated PAC. Frazer Lanier employees held leadership positions within the non-profit organization, and one of Frazer Lanier's muni professionals served in a leadership position with the organization's affiliated PAC.

"The firm was aware that the non-profit organization engaged in political activities and contributed to political candidates through the PAC," FINRA said. "The firm had no system to monitor the PAC's endorsements or contributions to political candidates, including to detect whether the PAC made any contributions to officials of municipal entities with dealer-selection influence."

FINRA also censured and fined the firm in 2017 for similar violations of G-27 and for
failing to report transactions to the MSRB's Real-time Transaction Reporting System and FINRA's Trade Reporting and Compliance Engine and related supervisory violations.

Frazer Lanier has 15 registered employees in three branch offices, FINRA said.

Separately, FINRA disciplined Florida-based independent broker-dealer International Assets Advisory, LLC, for failing to report trades, which the regulator found as part of its 2023 cycle exam of IAA.

The firm has 155 registered representatives and 100 branch offices.

From May 2021 through July 2023, IAA failed to report approximately 290 transactions in Trade Reporting and Compliance Engine-eligible securities to TRACE, FINRA said. The firm only reported the trades it conducted with other broker-dealers and "failed to report the off-setting trades, which were step-out transactions for a customer who was an independent investment adviser," the regulator said.

Over the same period, IAA failed to report approximately 270 municipal securities transactions to the MSRB's Real-time Transaction Reporting System. Again, the firm only reported the trades it conducted with other broker-dealers and did not report the customer side of the step-out transactions for a customer who was an independent investment adviser.

From July 2023 through November 2023, the firm reported approximately 40 canceled transactions to RTRS that should not have been reported because they were canceled, FINRA said.

Without admitting or denying the findings, IAA agreed to the censure and a $20,000 fine.

An attorney for Frazier Lanier noted that the enforcement action focused only on written supervisory rules, an "ever-evolving and improving state of affairs" for most firms.

"This was a [written supervisory procedures] problem, not a harm-to-the-market problem," said Trace Schmeltz, partner at Barnes & Thornburg LLP, which represents the firm.

"The fact is, the [municipal finance professional] wrote a check on a joint checking account and in the memo line indicated that half of the money was from the MFP spouse," Schmeltz said. "It is someone who tried to indicate their compliance in a clear way but the Frequently Asked Questions interpreting the rule suggests further efforts need to be made."

A spokesperson for IAA said of the FINRA action, "This was the result of an administrative oversight, with no harm to our clients. We are pleased to have put this matter behind us."