Firm Settles Charges for Unsuitable Recommendations
A firm settled FINRA charges for failing to supervise the transmittal of customer funds by representatives with power of attorney and for failing to respond to red flags involving unsuitable trading recommendations.
According to the AWC, FINRA found that an associated individual of the firm recommended more than 100 speculative options trades to a customer who had no options experience. FINRA stated that the majority of the trades were short-term, out-of-the-money calls or puts, many of which expired or were worthless and caused the customer's account to lose nearly 80% of its value in less than a year. FINRA said that the trading activity triggered over 10 alerts that the firm did not investigate. FINRA found that the firm approved a change in the customer's investment objectives from "growth and income" to "speculative/active trading/complex strategies" based on the associate's representations. FINRA also found that the firm suppressed several subsequent options alerts involving the customer's account.
In addition, FINRA said that the same associated individual recommended speculative options trading to another customer who had no options experience and who had growth and income investment objectives and a moderate growth risk tolerance. The associate recommended 37 call options, most of which were out-of-the-money, and half of which expired in 10 days or less, resulting in substantial losses to the customer. FINRA found that the trading was flagged by the firm's systems and that the firm failed to reasonably respond. FINRA also found that the associate purchased a "collapsing equity" for 5 of his customers. The firm flagged this trading activity for further monitoring, yet failed to take steps other than asking the associate about the customer's knowledge of and comfort with the purchases.
FINRA also found that another associated individual converted at least $105,000 from a senior customer's account under power of attorney.
As a result, FINRA found that the firm violated NASD Rule 3010, FINRA Rule 3110 ("Supervision"), and FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to (i) a censure, (ii) a $400,000 fine and (iii) restitution of $59,360 plus interest.