Securities Litigation

The Financial Institutions Regulatory Authority fined a UBS unit $750,000 for mistakenly reporting customers' municipal-bond-account interest was tax-exempt, when the firm's handling of the trades made it taxable instead. Because the brokerage itself paid over 4000 customers about $1.2 million in interest, the payments weren't tax exempt; to qualify, the interest must be paid directly by a municipal issuer. Instead, the firm had used the customers' long positions in those bonds to cover the firm's short positions and so made substitute interest payments. FINRA's AWC stated ...

FINRA issued its late-July Regulatory Notice 15-27 warning brokerage firms that inadvertent short positions or fail-to-delivers in municipal securities trading can create situations where the member-firm pays a customer substitute interest that is not tax-deductible. Firms need to ensure their supervisory and compliance systems, and just as importantly their customer communications, address those situations. Short sales of municipal securities (selling a borrowed position, and buying it in lower, later) are rare. But the IRS has held that the lender's receipt of interest ...