FINRA Fines Broker-Dealer and Principal for Reg BI Failures

A broker-dealer and one of its principals settled FINRA charges for violations of Regulation Best Interest and supervisory failures over the sale of speculative alternative investments.

According to the AWC, the firm and its principal recommended speculative alternative investments, including illiquid corporate bonds and non-traded real estate investment trusts. FINRA found that the firm's representatives recommended these products to customers without adequately considering the customers' liquidity needs, risk tolerance, or overall investment profiles. Specifically, FINRA identified instances where:

• A 71-year-old retired customer with a moderate risk tolerance and net worth of approximately $851,000 invested $400,000 across five illiquid, non-traded alternative investments, resulting in a 47% concentration in speculative products.
• A second customer with an annual income of no more than $25,000 and a net worth of approximately $587,000 invested $457,000 in illiquid, non-traded alternative investments, including $90,000 in corporate bonds issued by a company that later defaulted and filed for bankruptcy. The transactions resulted in a 77% concentration in speculative products, including 15% in high-risk corporate bonds.

FINRA said the firm failed to identify red flags and did not conduct further review before approving the sales and found that the firm failed to enforce its own supervisory procedures, which required heightened review for alternative investment concentrations exceeding certain thresholds. FINRA also found that the firm lacked adequate written policies designed to ensure compliance with Reg BI and did not provide supervisors with sufficient guidance on assessing the suitability of alternative investments.

FINRA determined that the firm violated Exchange Act Rule 15l-1 ("Regulation Best Interest") and FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision"). The firm's principal was also found to have failed to reasonably supervise under FINRA Rule 3110.

To settle the charges, the firm agreed to (i) a censure, (ii) a $50,000 fine and (iii) certify that it implemented a supervisory system designed to achieve compliance with Reg BI. The principal agreed to (i) a one-month suspension in all principal capacities, (ii) a $5,000 fine and (iii) completion of 20 hours of continuing education focused on Reg BI compliance.