Published on:

FINRA Orders Santander Securities LLC to Pay $6.4 Million for Supervisory Failures in Connection with Sales of Puerto Rican Bonds

On October 13, 2015, the Financial Industry Regulatory Authority (“FINRA”) announced that Santander Securities LLC (“Santander Securities”) has to pay approximately $6.4 million in fines for supervisory related violations surrounding the sale of Puerto Rican Municipal Bonds (“PRMBs”) to Puerto Rican customers.  Historically, PRMBs generated steady income and provided significant tax advantages for Puerto Rican residents, as the PRMBs are exempt from federal, state, and local taxes, as well as Puerto Rico’s estate tax.  However, on December 13, 2012, Moody’s downgraded Puerto Rican General Obligation Bonds and any related debt to ‘Baa3,’ reflecting the plummeting Puerto Rican economy, and establishing a risk level for PRMBs that barely surpassed that of junk-bonds.

Pursuant to FINRA’s Letter of Acceptance, Waiver and Consent (“AWC”), Santander Securities failed “to have a reasonably designed supervisory system and procedures relating to sales of [PRMBs] to Puerto Rico customers.”  The AWC further states that, “Santander [Securities’] systems and procedures were inadequate because … they did not require the [f]irm to review or assess that its proprietary product risk-classification tool took into account the unique changed risks of investing in PRMBs.” The AWC also states that, “although Santander [Securities] had certain reports to identify concentration levels and margin activity in customer accounts, [Santander Securities] did not have adequate systems and procedures in place to monitor for the appropriate use of margin in connection with the purchase of PRMBs or to monitor for potentially over-concentrated positions in PRMBS and Puerto Rico Closed-End Funds.”  FINRA also concluded that, from October 2010 through April 2014, “Santander [Securities] failed to have adequate systems and procedures governing transactions in Puerto Rico employee brokerage accounts.  While [Santander Securities] had a policy requiring the pre-approval of employee trades, its systems were not designed to detect transactions effected between employee brokerage accounts and the accounts of [Santander Securities’] customers. As a result, [Santander Securities] was unable to adequately monitor for potential conflicts of interest where customer orders were filled through positions in Puerto Rico employee brokerage accounts.”

As a result of their supervisory failures, FINRA imposed a censure on Santander Securities, and ordered them to pay a fine of $2 million, and restitution of approximately $4.3 million.  Pursuant to the AWC, Santander Securities neither admitted nor denied the charges, but consented to the entry of FINRA’s findings, and further agreed to review all of its current written policies and procedures.  Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “[t]his is a strong reminder to firms that they must focus on customers’ exposure to market risks and suitability, particularly in those markets like Puerto Rico that present unique risks and challenges.”

Santander Securities is a full-service brokerage firm that is a wholly owned subsidiary of Santander BanCorp, organized under the laws of the Commonwealth of Puerto Rico.  Santander Securities is headquartered in San Juan, Puerto Rico, and has approximately 720 registered representatives throughout 690 branch offices.

Lax & Neville LLP is investigating claims on behalf of investors regarding possible sales practice abuses in connection with the sale and marketing of various bond funds to customers in Puerto Rico.  These municipal bond funds ultimately trailed the sinking Puerto Rican economy, as Puerto Rico’s economic woes have caused the devaluation of municipal bond funds generally.  Lax & Neville has extensive experience in successfully prosecuting claims on behalf of customers and investors who have suffered losses, including experience in prosecuting claims involving leveraged funds.  Please contact our team of attorneys for a consultation at (212) 696-1999.