FINRA fines firm $300,000 for retail order period violation

The Financial Industry Regulatory Authority has fined New York-based Drexel Hamilton $300,000 in addition to charging four of its registered representatives for submitting retail orders and zip codes for new issue municipal bonds without any basis for such designation.

Without admitting or denying the findings, the firm was also ordered to pay disgorgement of $857,353; registered representative Michael Ivcic was given a $30,000 fine and a 15-month suspension from associating with any FINRA member firm; Frederick Phelan was fined $20,000 and given a four month suspension; David Steigerwald was fined $30,000 along with a six month suspension and Thomas Mead was fined $15,000 and given a six-month suspension.

All in, the firm and its four representatives violated MSRB Rule G-11(k), the subsection of the primary offering practices on retail order period representations and required disclosures, MSRB Rule G-17 on the conduct of municipal securities and municipal advisory activities as well as MSRB Rule G-27 on supervision.

“Municipalities issuing new bonds often set different order periods for retail and institutional customers with priority given to retail customers because of a preference that the bonds be sold to investors who are likely to hold the bonds rather than quickly trade them. Municipalities also often prioritize sales of bonds to retail customers living in the jurisdiction of the municipality so that local investors can take advantage of state or local government tax benefits,” FINRA said.

“During the period from January 2016 to August 2018, Drexel Hamilton participated in a number of offerings for new issue municipal bonds as a co-manager or a member of the selling group,” FINRA said. “The firm did not have retail customers for its orders of new issue municipal bonds. Rather, it submitted such orders on behalf of other broker-dealers who had, in turn, placed orders with the firm.”

Throughout the more than two and a half year period, the firm submitted orders on at least 572 occasions to the syndicate manager that it had received from broker-dealer counterparties and that were designated retail, without any basis to do so. They also included zip codes, which are required for retail orders, but were not associated with any customers at all.

“Because the orders included a zip code and therefore appeared to be for bona fide retail customers, the syndicate senior manager allocated bonds to the firm during the retail order period,” FINRA said.

On 44 occasions, Drexel Hamilton received orders from broker-dealers that exceeded the $1 million per order maximum set out in pricing wires but when they were submitted to the syndicate senior manager, the firm had split those orders into smaller orders in order to evade the limit set out in the retail period eligibility criteria. 

“The sales of the bonds in violation of the retail order period rules generated significant commissions for the firm,” FINRA said.

Specifically, Michael Ivcic was the syndicate representative who submitted orders to the syndicate senior manager and entered the information for orders into the order management system. He was, at times, accused of splitting the order into multiple, smaller orders and during the relevant period he submitted 276 retail orders with zip codes not associated with anyone.

Ivcic also violated Section 17(a)(2) of the Securities Act,

David Steigerwald submitted tickets with false zip codes on 127 occasions, and Frederick Phelan did the same on 46 occasions. 

Thomas Mead was head of the firm’s municipal department and failed to reasonably supervise Drexel Hamilton’s sale of new issue municipal bonds, violating MSRB Rule G-27.