For the second time in less than a month, a global bank with operations in Puerto Rico has agreed to pay millions of dollars to settle accusations that it violated industry rules when selling the island’s bonds to customers.
Santander Securities, a subsidiary of Banco Santander, will pay $4.3 million in restitution to clients on the island who lost money on Puerto Rican bonds, according to the Financial Industry Regulatory Authority, known as Finra.
Finra also said that the brokerage unit would buy back Puerto Rican bonds from a limited group of customers who still hold them, and would pay a fine of $2 million for failing to properly supervise its employees. It estimated the total restitution and penalties at $6.42 million.
Finra’s settlement letter said it was relevant that the Santander unit had already been disciplined in 2011, and was required to pay $9 million to resolve other “deficiencies.”
A spokeswoman for Santander said that the brokerage unit was “pleased to resolve this matter” and would comply with the settlement terms. “The firm has taken steps to enhance its controls in connection with the activities described in the Finra letter,” she said.
For many years Puerto Rican bonds were a popular investment, both on the island and the United States mainland, because they offer tax benefits and often a higher yield than comparable bonds issued by American states and cities.
Puerto Rico is now in deep financial trouble, however, and its governor, Alejandro García Padilla, has been calling for a debt moratorium. In this environment, its bonds’ values have plunged.
Finra’s enforcement action grew out of the way Santander Securities brokers bought and sold the bonds in the firm’s dealings with customers over about three and a half years, starting in 2010.
Some of the violations began in December 2012, when Moody’s Investors Service downgraded Puerto Rico’s general obligation bonds to one notch above junk, saying that the island was carrying a large, growing debt; that its pension system might run out of money; and that it was issuing bonds to raise cash for day-to-day operations, a practice that is not sustainable.
Just one month earlier, the Santander brokerage unit had begun selling off its own inventory of Puerto Rico’s bonds. The downgrade prompted it to accelerate the process, Finra said, reflecting the firm’s heightened concern about the risk.
But at the same time, the Santander unit did nothing to change the internal, color-coded system that its brokers used to assess the risks of various securities. The system made it seem as if nothing had happened, and the brokers kept selling the bonds to their clients. Retail customers bought about $180 million of the bonds directly, and another $101 million of them through Santander’s closed-end funds.
In addition, the Santander unit failed to supervise its clients’ use of margin loans to buy even more of the bonds than their own resources would permit. That meant some clients not only bought the shaky debt instruments, but ended up increasing their own indebtedness as well, Finra said. In a falling market, a brokerage firm is expected to have systems for tracking its clients’ margin purchases and making sure they are still suitable. Finra said some Santander brokers who received “buy” orders from their clients sold them Puerto Rican bonds out of their personal portfolios. Finra said the brokerage unit was required to monitor such transactions to make sure the customers knew there was a potential conflict of interest, but it had no procedures in place for doing so.
It said the clients bought about $50 million worth of the bonds in such transactions. The settlement calls for Santander to buy back the bonds that were sold out of employee accounts, for a total $121,000.
Finra earlier took an enforcement action against the Puerto Rican operations of UBS, the large Swiss bank. It agreed to pay a total of $34 million in fines and restitution after Finra, along with the Securities and Exchange Commission, found improprieties and conflicts of interest in the underwriting and marketing of Puerto Rican bonds.
Neither enforcement action affects American investors on the mainland who have purchased Puerto Rican bonds.
Santander to Pay $6.4 Million in Puerto Rico Bond Settlement
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