Firm Fined for Unsuitable Syndicate Preferred Stock Trading

A firm settled FINRA charges for failing to detect unsuitable short-term trades of syndicate preferred stocks.

According to the AWC, during a two-year period, the firm permitted representatives to recommend syndicate preferred stocks—securities "generally purchased for their income features and held long-term"—to customers, while simultaneously facilitating a pattern of short-term trading in those same products. FINRA highlighted that the firm earned sales concessions and customer commissions on each trade, with representatives receiving a share of both. 

FINRA found that during the relevant period "at least 15 [firm] representatives or teams" directed customers to make more than 1,000 purchases of syndicate preferred stock that were "sold on a short-term basis" at a realized loss. FINRA determined that from these trades, the firm earned approximately "$1.67 million in selling concessions" from issuers and around "$157,000 in sales commissions" from customers.

FINRA determined that the firm was required to implement a supervisory system designed to ensure that recommended transactions were suitable for customers. FINRA stated that, despite this obligation, relevant business lines lacked written procedures or guidance on holding periods or the risks associated with short-term trading in syndicate preferred stock.

FINRA also found that while the firm's electronic surveillance system occasionally flagged "short-term trading in preferred stock," it lacked alerts specifically targeting syndicate preferred stock. FINRA stated that the firm relied on account-wide metrics like "cost-to-equity ratio and turnover rate," but "did not implement relevant product-specific alerts or reviews." The failure to implement such alerts resulted in most short-term trades going undetected—including over 150 loss-generating trades by one representative. FINRA stated the firm "could not identify patterns of potentially problematic short-term trading" unless preferred stocks dominated the account and "generally did not take reasonable action" to investigate such activity.

FINRA concluded that the firm violated FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision"). 

To settle the charges, the firm agreed to (i) a censure, (ii) a $350,000 fine, (iii) restitution of $157,504.96 plus interest, and (iv) disgorgement of $1,672,923 plus interest.