Compliance August 18, 2010

NJ Hit with Fraud Charges for Pension Funding Disclosure Failures

In the first such action of its kind, the U.S. Securities and Exchange Commission (SEC) charged the state of New Jersey with securities fraud for not properly disclosing when selling municipal bonds that its two largest public pension programs were underfunded.  

Reported by

An SEC news release said the charges relate to more than $26 billion worth of municipal bonds offered on 79 occasions between August 2001 and April 2007. New Jersey agreed to settle the case without admitting or denying the SEC’s findings.

According to regulators, the offering documents “created the false impression” that the Teachers’ Pension and Annuity Fund (TPAF) and the Public Employees’ Retirement System (PERS) were being adequately funded. In fact, according to the SEC, New Jersey could not contribute to TPAF and PERS without raising taxes, cutting other services, or otherwise affecting its budget.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Regulators charged that bond purchasers did not have enough information to determine New Jersey’s ability to fund its pensions or to figure out the impact of that funding on the state’s overall financial situation.

“All issuers of municipal securities, including states, are obligated to provide investors with the information necessary to evaluate material risks,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, in the announcement. “The State of New Jersey didn’t give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation.”

 

(Cont...)

Failure to Disclose Specifics  

The SEC said that among New Jersey's material misrepresentations and omissions were that it failed to disclose and misrepresented information about:

  • legislation adopted in 2001 that increased retirement benefits for employees and retirees enrolled in TPAF and PERS;
  • special Benefit Enhancement Funds (BEFs) created by the 2001 legislation initially intended to fund the costs associated with the increased benefits;
  • the state's use of the BEFs as part of a five-year "phase-in plan" to begin making contributions to TPAF and PERS; and
  • the state's alteration and eventual abandonment of the five-year phase-in plan.

Furthermore, the SEC said, the state had no written policies or procedures about the review or update of the bond offering documents and the state did not provide training to its employees about the state's disclosure obligations under accounting standards or federal securities laws.

A New York Times account of the charges said New Jersey’s largest bond underwriters during the period include Citigroup, JPMorgan Securities, Morgan Stanley, Bank of America, Merrill Lynch, Goldman Sachs, and Barclays Capital.

More information about the charges is at http://sec.gov/litigation/admin/2010/33-9135.pdf. 

 

Compliance August 18, 2010

Merrill Lynch Fined for UIT Discount Failures

The Financial Industry Regulatory Authority (FINRA) has fined Merrill Lynch $500,000 for failing to provide sales charge discounts to customers of eligible purchases of Unit Investment Trusts (UITs).
Reported by

A press release said FINRA also charged Merrill Lynch for lacking an adequate supervisory system to monitor appropriate sales and discounts. The firm agreed to provide remediation of more than $2 million to affected customers.

Unit Investment Trusts offer redeemable units of generally fixed portfolio of securities that terminate on a specific date. The announcement explained that UIT sponsors often offer “breakpoint” and “rollover and exchange” discounts to investors. A breakpoint discount is defined as a reduced sales charge based on the total price of the purchase, giving greater discounts for higher costs. A rollover or exchange discount is a reduced sales charge that is offered to investors who use the termination or redemption proceeds from one UIT to purchase another UIT.  

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

In March of 2004, FINRA issued a Regulatory Notice to remind firms that they should develop and implement procedures to ensure their customers pay only appropriate costs for UITs. Merrill Lynch’s written supervisory procedures prior to May 2008 had little to no information regarding UIT sales charge discounts, and have since offered inaccurate and even conflicting guidance, according to the press release. Without substantive guidelines or policies established, between October 2006 and June 2008 the firm failed to apply appropriate discounts to their customers’ UIT purchases.  

Merrill Lynch also approved for distribution, and for use in client presentations, inaccurate and misleading UIT sales literature, FINRA said. The presentation discussed sales charge discounts, but led clients to believe that they were only entitled to a discount if they used UIT proceeds to purchase a new UIT offered by the same sponsor. 

As part of the settlement, Merrill Lynch is providing restitution to all customers who were overcharged when purchasing UITs through the firm, from January 2006 to the present. Merrill Lynch settled this matter without admitting or denying the allegations, but consented to the entry of FINRA’s findings. 

Investors can find more information about FINRA-registered brokers and firms at www.finra.org/brokercheck.  

 

«