According to FINRA, Crews & Associates, Inc. was censured, fined $50,000, and required to remediate its supervisory system regarding municipal bond transactions with affiliated entities.

The firm violated MSRB Rules G-18 and G-17 by selling municipal bonds to an affiliated bank while charging markups, despite an agreement prohibiting such markups. The firm had agreed with its affiliate not to sell secondary market bonds with a markup. To implement this arrangement, the firm created two trading accounts: one for bonds intended for the affiliate (without markups) and a general inventory account (with markups) for other customers.

The firm's former head trader circumvented this arrangement by interposing third-party broker-dealers in 94 transactions. The trader allocated bonds to general inventory, added a markup, and then indirectly sold the bonds to the firm's affiliate bank through intermediaries. The affiliate bank paid $918,476 in aggregate markups and fees that it would not have paid under the agreed-upon arrangement.

The firm failed to implement a reasonable supervisory system to address the conflict of interest in this selling arrangement and to monitor for potential violations. The firm did not discover these indirect sales through third-party intermediaries until later, and its written procedures did not address the conflict presented when allocating bonds between the affiliate-related account and general inventory.

After discovering the transactions, the firm permitted the trader to resign and reimbursed its affiliate $918,476. This case illustrates the importance of supervisory controls to prevent circumvention of policies designed to manage conflicts of interest. Municipal bond investors should understand that markups and trading costs can significantly impact investment returns, and firms have obligations regarding fair pricing under MSRB rules.