The Financial Industry Regulatory Authority is fining 10 firms $43.5 million in total for letting their equity research analysts solicit investment business and offering favorable research coverage related to the the planned Toys “R” Us initial public offering. The firms were fined: $2.5 million for Needham & Co. LLC; $4 million for Wells Fargo Securities, LLC (WFC), Deutsche Bank Securities Inc. (DB), Morgan Stanley & Co., LLC (MS), and Merrill Lynch, Pierce, Fenner & Smith Inc. respectively; and $5 million each for JP Morgan Securities LLC (JPM), Barclays Capital Inc. (BARC), Goldman Sachs & Co. (GS), Citigroup Global Markets Inc. (C), and Credit Suisse Securities USA LLC (CS). FINRA rules state that firms are not allowed to use research analysts or promise favorable research to garner investment banking business.
In 2010, Toys “R” Us and its private equity owners asked the ten firms to compete for involvement in an initial public offering. The self-regulatory organization said that all of the institutions used equity research analysts when soliciting for this role.
The company asked the analysts to create presentations to determine what their views were on certain issues and if they matched up with the perspectives of the firms’ investment bankers. The firms knew that how well their analysts did with this would impact whether or not they would be given the underwriting role in the IPO.
In the presentations, the firms explicitly or implicitly made known that they would provide reasonable research coverage in exchange for involvement in the IPO. While Toys “R” Us offered each firm a part in the IPO, ultimately the actual offering never went through. FINRA also said that Needham, Barclays, JP Morgan, Citigroup, Goldman Sachs, and Credit Suisse lacked the adequate supervisory procedures for research analyst involvement in investment banking pitches.
By settling, the firms are not denying or admitting to the charges. They are, however, consenting to an entry of the SRO’s findings.
FINRA also just fined Citigroup $3 million for its failure to deliver exchange-traded fund paperwork on over 250,000 customer purchases. The bank failed to send prospectuses on 160 ETFs that clients purchased in 2010 and on more than 1.5 million exchange-traded funds that were bought between 2009 and 2011. Over 250,000 brokerage clients were affected.
The self-regulatory organization said that Citigroup lacked the correct procedures to oversee this process. Instead, the bank depended on a manual system that was missing a definite chain of supervision to verify whether prospectuses had been sent. The firm discovered the issue in 2011, self-reporting to FINRA. Citi paid a $2.3 million for similar issues in 2007.
FINRA Fines 10 Firms a Total of $43.5 Million for Allowing Equity Research Analysts to Solicit Investment Banking Business and for Offering Favorable Research Coverage in Connection With Toys”R”Us IPO, FINRA, December 11, 2014
Citigroup Fined by Finra for Failing to Deliver ETF Prospectuses, Bloomberg, December 12, 2014
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