FINRA Censures Broker-Dealer for Reg BI Failures on Alternative Assets
A firm settled FINRA charges for failing to supervise its representatives' recommendations of speculative investments to retail customers who later incurred losses.
According to the AWC, during the relevant period, two registered representatives recommended that six retail customers - five of them senior investors - purchase a total of $460,000 in unrated, speculative, high-risk, and illiquid so-called L Bonds. FINRA said that all six individuals had moderate risk tolerance and a no speculation objective; the recommendations brought up to 43 percent of their liquid net worth into alternative investments. The issuer later defaulted on its L Bond obligations and filed for bankruptcy.
FINRA found that a third representative recommended that four retail customers - ages 57 to 92 - purchase approximately $45,000 in daily-reset non-traditional exchange traded products ("NT-ETPs") designed to return three times the daily move of an underlying benchmark, and hold them for periods of 253 to 693 days. Three of the four had moderate risk tolerance. The four customers incurred $15,072.62 in realized losses. FINRA said it had previously cautioned firms that NT-ETPs were typically not suitable for retail investors holding them for longer than a single trading session. FINRA found that the firm's written supervisory procedures for alternative products required supervisors to review a concentration worksheet, but did not require them to assess whether the representative had a reasonable basis for the recommendation. Further, FINRA found that firm supervisors took no steps to confirm that the three representatives had a reasonable basis for the recommendations.
FINRA also found that the firm failed to timely respond to eight FINRA requests for documents and information under Rule 8210 ("Provision of Information and Testimony and Inspection and Copying of Books") on the L Bond sales and Reg BI implementation. FINRA said the firm missed multiple deadlines without seeking extensions and prompted FINRA to issue a Notice of Suspension under FINRA Rule 9552 ("Failure to Provide Information or Keep Information Current") which ultimately led the firm to produce the requested materials.
FINRA found that the firm willfully violated Exchange Act Rule 15l-1(a)(1) ("Regulation Best Interest") and violated FINRA Rule 3110 ("Supervision"), FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade"), and FINRA Rule 8210. FINRA stated that the willful Reg BI violation makes the firm subject to a statutory disqualification under Article III, Section 4 ("Disqualification") of FINRA's By-Laws.
The firm consented to a censure and partial restitution of $145,072.62 plus interest to nine customers payable within 120 days after acceptance. FINRA noted that for the five L Bond customers, restitution equaled 50 percent of principal; the sixth previously settled with the firm. For the four NT-ETP customers, restitution equaled realized losses.