FINRA Suspends Broker for Unsuitable Options Recommendations
Commentary by Steven Lofchie
A broker settled FINRA charges for recommending an unsuitable and speculative options strategy to retired senior customers.
According to the AWC, a broker recommended that several retired senior customers liquidate their diversified portfolios and pursue a speculative options strategy, despite their moderate risk tolerances and lack of experience with options. FINRA found that the broker advised these customers to sell large volumes of puts in volatile technology stocks, often with strike prices close to market value, exposing them to substantial losses when the stocks declined and leaving them with concentrated positions in single securities.
FINRA found that one retired customer in his early seventies was advised to replace most of his holdings with put sales in a single technology stock. FINRA stated that when the contracts were exercised, the customer was required to purchase thousands of shares well above market price, resulting in an outsized concentration that made up more than 80 percent of his account. FINRA determined that this customer ultimately incurred losses of more than $130,000 and stated that the broker's recommendations were unsuitable and not in the best interest of customers.
FINRA concluded 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 2360 ("Options").
To settle the matter, the broker agreed to a nine-month suspension from associating with any FINRA member in all capacities. FINRA stated that no monetary sanctions were imposed due to demonstrated inability to pay.
Commentary
Over the last several days, FINRA settled a number of enforcement actions against individual brokers who put elderly customers into unsuitable positions or who traded at a level that, considering the costs of commissions, could not do anything but lose substantial money, which many of the trades seem to do even without the commission cost. (See, e.g., FINRA Suspends Brokers for Excessive Trading; FINRA Suspends Broker for Excessive Trading.)
It is not uncommon for FINRA to impose fines that seem quite substantial against institutions for violations that seem unintentional and do not result in injury. Perhaps this is because FINRA determines that the institutions can afford it. In the present case, FINRA imposed no fine on the basis that the individual broker could not afford to pay it. Why should the broker be permitted to work in the industry again—FINRA imposed a nine-month suspension—as the conduct seems no different than theft from an elderly individual to whom the broker owed some duty of care, however one wishes to categorize that standard of care.