Dual Registrant Settles Charges for Offering Unsuitable Recommendations
Commentary by Nick Allen
A dually registered broker-dealer and investment adviser settled SEC charges for providing unsuitable recommendations on complex variable interest rate structured products ("VRSPs") to investors nearing retirement age. A registered representative of the firm and a branch manager were also charged in the matter.
According to the Order, the SEC found that several registered representatives of the firm recommended investments in VRSPs to customers that did not satisfy the firm's suitability criteria, knowing that those customers were not suitable for such investments based on financial needs, investment objectives and experience, risk tolerance and liquidity needs. The SEC said that the branch manager approved each VRSP recommendation without considering the firm's customer-specific suitability review requirements.
Additionally, the SEC found recordkeeping violations, including failures to maintain records of customers' approval of changes in their account information.
The SEC determined that the firm violated SA Sections 17(a)(2) and 17(a)(3) ("Fraudulent Interstate Transactions"), SEA Section 17(a) ("Records and Reports"), SEA Rule 17a-3 ("Records to be made by certain exchange members, brokers and dealers") and Rule 17a-4 ("Records to be reserved by certain exchange members, brokers and dealers"). The registered representative and branch manager were each found to have violated SA Sections 17(a)(2) and 17(a)(3).
To settle the charges, the firm agreed to (i) a censure, (ii) cease and desist, (iii) a civil monetary penalty of $750,000 and (iv) disgorgement of $4,876 plus prejudgment interest of $623. The registered representative agreed to (i) cease and desist, (ii) a six-month suspension from affiliating with any SEC-registered entity or penny stock offering and (iii) a civil monetary penalty of $35,000. The branch manager agreed to (i) cease and desist, (ii) a six-month suspension from acting in a supervisory capacity with any SEC-registered entity, (iii) a civil monetary penalty of $206,000 and (iv) disgorgement of $92,650 plus prejudgment interest of $11,842.
Commentary
It should go without saying, but merely having procedures in place (as the firm here did) is not enough; those procedures must be followed. Structured products afford an opportunity to create an instrument tailored to the specific needs of clients, but that customizability is often accompanied by complexity. Accordingly, policies that require assessments of both (i) the customer's specific experience and objectives and (ii) the key features and risks of the particular product must be instituted and followed.