Banks fined over bond fees

In a case involving California municipal bond sales, five leading Wall Street investment banks were fined Thursday for using taxpayer money to pay a lobbying group in San Francisco.

Regulators said the five banks carved hundreds of thousands of dollars in proceeds from municipal bond offerings to pay fees to the California Public Securities Association. Cal PSA is a trade association that lobbies the Legislature on government finance issues. Officials said the case involved hundreds of state and local bond offerings from 2006 to 2010.

Without admitting or denying any wrongdoing, the five banks agreed to pay a total of nearly $4.5 million in fines and restitution, according to the Financial Industry Regulatory Authority.

FINRA said the banks passed along their Cal PSA fees to state and local taxpayers without proper disclosure.

"(Bond) issuers are entitled to know what they are paying for and why," said FINRA executive vice president Brad Bennett in a press release. "It was unfair for these underwriters to pass along the costs of their Cal PSA membership to the municipal and state bond taxpayers."

The five banks are Citigroup, Goldman Sachs, JPMorgan, Merrill Lynch and Morgan Stanley. According to the settlement documents, Cal PSA levied "underwriting assessments" on its member firms when they handled municipal bond offerings.

The assessments were as much as $25,000 per bond sale. The five banks then passed the costs on to the state and local agencies issuing the bonds, FINRA said. Officials with Cal PSA couldn't be reached for comment.

The matter first surfaced nearly two years ago, when FINRA began looking into the practice. California State Treasurer Bill Lockyer then got involved, demanding that investment banks handling state bond sales halt the practice. Lockyer also pressed them to return money they'd taken from the state to pay Cal PSA and a national trade association, the Securities Industry and Financial Markets Association, or SIFMA.

All told, the banks returned around $2.3 million to the state, said Lockyer's spokesman Bill Ainsworth.

"It was wrong for underwriters to charge taxpayers for the money they're paying for lobbying," he said.

Most of the $2.3 million collected by Lockyer came from the same five banks that settled the FINRA case Thursday. Smaller amounts were returned by E.J. De La Rosa, Jefferies & Co., Barclays Capital, M.R. Beal, Piper Jaffray, Ramirez & Co., RBC Capital, Siebert Brandford, Southwest Securities, Stone & Youngberg, UBS, Wedbush Morgan and Wells Fargo.

Unlike Lockyer, FINRA didn't address fees that the investment banks paid to the national securities association, SIFMA. Investigators decided the money paid to Cal PSA constituted "the most egregious fees to pass along," said FINRA spokeswoman Nancy Condon.

• Read more articles by Dale Kasler

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