FINRA fines member firm and former chief executive for markups

The Financial Industry Regulatory Authority has fined Little Rock, Arkansas-based Crews and Associates $50,000 and its former head trader and chief executive Rush F. Harding $30,000 for their roles in selling municipal bonds with markups to an affiliated bank, with Harding having violated MSRB Rule G-18 on best execution and Rule G-17 on conduct and the firm violating Rule G-27 on supervision.

Crews has been censured and within sixty days, must provide in writing evidence the firm remediated the issue identified and implemented a written supervisory system to guard against the problems that arose. Harding, the co-founder of Crews, who was with the firm from its inception in 1979 to 2021, was charged separately by FINRA and in addition to his $30,000 fine, he received a one-year suspension from associating with any FINRA member in any capacity.

The conduct came to light when the firm was filing paperwork to fire Harding after completing an internal review. According to the form, the investigation concluded that Harding, over a four-year period, “inserted additional trading activity with other broker dealers,” that his “actions concealed that he was receiving brokerage commissions beyond his agreed upon compensation,” and that the trades were conducted in contravention of his arrangement with the client.

The transactions in question occurred from June 2017 to June 2021, when FINRA found Harding violated MSRB rules in connection with 94 municipal securities transactions with a bank affiliate. The firm had agreed it would not charge markups to its affiliate, but Harding circumvented his firm’s prohibition by indirectly selling marked-up bonds to the affiliate from the Crews’ general inventory account using third-party broker-dealers. 

The affiliated bank then paid $918,476 in markups as a result of Harding’s conduct, FINRA said, and Harding willfully violated MSRB Rules G-18 on best execution and G-17 on conduct.

Crews did not account for Harding’s conducting of indirect sales in its supervisory systems and therefore violated MSRB Rule G-27 on supervision.

“The firm did not discover, and therefore did not review for, potential indirect sales of bonds in general inventory to its affiliate through third-party intermediaries until Aug. 2021,” FINRA said. “In addition, the firm’s written supervisory procedures to date do not address the conflict presented when placing bonds in the affiliate-related account (precluding a markup) versus general inventory (entailing a markup).” 

Crews was sanctioned by the Securities and Exchange Commission in August 2021 for willfully violating MSRB Rule G-17 by recommending, through Harding, that a customer buy bonds through a tender offer without disclosing to the customer the conflict of interest arising from a Crews affiliate holding the same securities. They also violated MSRB Rule G-27 on supervision and were censured, issued a cease and desist and fined $244,072.

The Commission also sanctioned Harding and imposed a total of $146,481 in disgorgement, prejudgment interest and civil penalties.

Crews and Associates did not immediately respond to requests for comment for this story.