UNITED STATES SECURITIES AND EXCHANGE COMMISSION Securities Act of 1933 Release No. 7526 / April 23, 1998 Securities Exchange Act of 1934 Release No. 39912 / April 23, 1998 Administrative Proceeding File No. 3-9583 SECURITIES AND EXCHANGE COMMISSION INSTITUTES ADMINISTRATIVE PROCEEDING AGAINST FORMER MUNICIPAL SECURITIES BROKER ALLEGED TO HAVE ENGAGED IN YIELD BURNING On April 23, 1998, the Commission announced that it had issued an Order Instituting Public Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Sections 15B, 15(b) and 21C of the Securities Exchange Act of 1934 ("Order Instituting") against Steven T. Snyder ("Snyder"), a former registered representative of Meridian Capital Markets, Inc., a municipal securities dealer formerly registered with the Commission. Snyder had been the director of the firm's Public Finance Department. In the Order Instituting, the Division of Enforcement ("Division") alleges that Snyder violated the antifraud provisions of the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 ("Exchange Act") resulting from conduct spanning the period from March 1993 though December 1995. The Division alleges that, during the period, Snyder engaged in a fraudulent scheme to generate profits for Meridian by charging various school districts and other municipalities in Pennsylvania and West Virginia unfair prices for U.S. Treasury securities. The securities were sold to the municipalities in connection with certain tax-exempt refinancings known as advance refundings. The Division alleges that, in carrying out the scheme, Snyder engaged in a practice known as "yield burning." In simplest terms, "yield burning" occurs when a broker or dealer purposely inflates the prices it charges its customers on Treasury securities in order to reduce the yield on those securities. The practice is most likely to occur in connection with advance refundings and other types of municipal bond refinancings. In a typical advance refunding, the municipality issues a new offering of tax-exempt bonds to retire a pre-existing issue of bonds bearing higher interest rates. The proceeds of the new bond offering are invested in Treasury securities. Federal tax laws restrict the yield that issuers can receive on these investments and require that the securities be purchased at fair market value. If the investments generate yields that exceed the yield on the new offering of bonds, an impermissible "arbitrage profit," might be generated in violation of the Internal Revenue Code. Under those circumstances, the Internal Revenue Service could declare the bonds taxable. The Division alleges that, by charging excessive mark-ups, Snyder improperly "burned" the yield. He then pocketed the excess profits. None of these facts, nor the fact that the bonds could lose their tax-exempt status, was ever disclosed to the municipalities. In some instances, Snyder also affirmatively misrepresented the fact that the Treasury securities were purchased at fair market value and complied with the federal tax laws. The Division also alleges that, in order to secure Meridian's selection in certain advance refundings, Snyder made undisclosed payments to certain financial consultants in West Virginia. A public hearing will be scheduled to determine whether the allegations against Snyder are true, and, if so, whether any remedial sanctions, as well as the issuance of a cease-and-desist order, is appropriate and in the public interest.