FINRA fines firm $90,000 for MSRB supervision rule violation

Broker-dealer Stephens Inc. has agreed to be censured and pay a $90,000 fine to settle a Financial Industry Regulatory Authority allegation that the firm violated a municipal securities rule by failing to have and enforce a supervisory system adequate to prevent violations related to political contributions.

Little Rock, Arkansas-based Stephens consented to FINRA’s findings without admitting or denying them according to a settlement document accepted by FINRA Aug. 12. The matter stemmed from a regulatory tip to FINRA, the document said.

FINRA found that from January 2021 through August 2024, the firm violated Municipal Securities Rulemaking Board Rule G-27 through its failure to set up, maintain and enforce a supervisory system – including written supervisory procedures – that was “reasonably designed to achieve compliance with the provisions of MSRB Rule G-37(b) governing political contributions by firms and municipal finance professionals (MFPs),” the document said. 

During the time period from January 2021 through August 2024, Stephens’ written supervisory procedures pertaining to political contributions by the firm’s municipal finance professionals included procedures aimed at determining whether the intended recipient of a political contribution was an issuer official. 

“However, Stephens employed a different process which was not memorialized in the firm’s WSPs or elsewhere for the majority of MFP political contributions to candidates for state-level offices from January 2021 through September 2022, which were made by one of the firm’s MFPs,” the settlement document said. 

For those political contributions, Stephens outsourced its responsibility to find out whether the candidates were issuer officials to a third party. The firm instructed the third party to get a signed certification from each candidate attesting that the candidate wasn’t an issuer official within MSRB Rule G-37’s meaning before the municipal finance professional’s contribution was made. 

Stephens, however, lacked a system or procedures to review whether the third party had obtained the required signed certification from the candidate prior to a political contribution being delivered and Stephens didn’t do such reviews, the settlement document said. 

“The firm therefore failed to timely detect that, in some instances, the third party delivered contributions from the MFP without first receiving signed certifications, including one instance in which a political contribution was made to an issuer official and exceeded MSRB Rule G-37’s de minimis exception,” the document said. “The firm’s unreasonable supervision created the risk that the firm would engage in municipal securities business in violation of MSRB Rule G-37.” 

The de minimis exception incorporated in Rule G-37(b) permits municipal finance professionals to make contributions to issuer officials for whom they are entitled to vote as long as “such contributions, in total, do not exceed $250 per MFP to each official per election.

Stephens ended its relationship with the third party in September 2022 and in late 2022 began requiring the legal department to review and pre-approve all municipal finance professional political contributions.  In August 2024, the firm updated its written supervisory procedures to reflect those new procedures. 

The firm did not respond to a request for comment.