FINRA has fined a broker-dealer $125,000 for failing to ensure customers received required disclosures related to municipal bonds trading at non-de minimis market discounts, a regulatory lapse that impacted nearly 2,000 transactions across more than 130 clients.

This enforcement action highlights a common compliance pitfall: outsourcing disclosure functions to third parties without robust supervisory oversight.

How Inadequate Oversight Put The Firm at Risk

Between January 2022 and October 2024, the firm relied on a third-party vendor to issue time-of-trade disclosures for municipal bond transactions. However, the firm:

  • Did not establish a process to verify whether customers actually received the disclosures
  • Lacked written supervisory procedures specifying how the vendor’s activity would be monitored
  • Failed to deliver required disclosures in 1,918 transactions totaling $40 million in principal value

These disclosures are critical; they alert customers that a portion of their investment return may be taxable as ordinary income due to the bond’s market discount status. Without them, clients may face unexpected tax consequences.

The Regulatory Fallout

FINRA determined that the firm violated MSRB Rule G-27 (Supervision) and G-47 (Time of Trade Disclosure) by:

  • Failing to design and implement a supervisory system reasonably tailored to ensure compliance
  • Omitting material market discount disclosures that were required at the time of trade

While the firm did ultimately send follow-up disclosures and offered to compensate affected clients for adverse tax outcomes, regulators made clear that remediation after the fact is no substitute for effective upfront compliance.

From Oversight to Action: How the Firm Responded

In October 2024, the firm introduced an automated disclosure and acknowledgement process, requiring clients to review and accept tax-related disclaimers before completing applicable bond transactions.

This enforcement action serves as a reminder for compliance teams that delegating tasks to third-party vendors does not eliminate responsibility. FINRA expects firms to:

  • Maintain clear supervisory procedures over any vendor involvement
  • Validate that required disclosures are delivered timely and completely
  • Update systems and procedures when gaps are discovered

Time-of-trade disclosures, especially in the municipal bond space, remain a high-priority enforcement area. Firms should review whether their own supervisory protocols, and vendor oversight programs, are truly equipped to meet MSRB expectations.

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