Broker-Dealer Settles Charges for Reg BI Failures

A broker-dealer settled FINRA charges for Regulation Best Interest ("Reg BI") duty of care violations and related supervisory deficiencies.

According to the AWC, firm representatives recommended high-risk products to customers without adequately considering their intended holding periods, risk tolerance, or investment objectives. FINRA found that the firm representatives failed to assess the suitability of recommendations involving "leveraged and inverse exchange-traded funds and leveraged and inverse mutual funds (Non-Traditional Funds.)"  Specifically, FINRA found instances where (i) a 98-year-old customer held a daily-reset leveraged fund for 19 days, incurring a $700 loss, and (ii) four customers held similar funds for periods ranging from 14 to 407 days, resulting in combined realized losses of over $28,000.

In addition, FINRA found that the firm lacked policies to guide supervisors on identifying and addressing unsuitable recommendations of complex products. FINRA noted that the firm's written supervisory procedures did not include criteria for determining whether these products were appropriate for retail customers or provide supervisors with tools to detect potential issues. FINRA also found that the firm failed to provide sufficient training to its representatives and supervisors on the risks and features of these products. 

FINRA determined that the firm violated Exchange Act Rule 15l-1 ("Regulation Best Interest") and FINRA Rules 2111 ("Suitability"), 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision"). FINRA noted that the firm delayed responding to FINRA's requests for information, further impeding the investigation.

To settle the charges, the broker-dealer agreed to (i) a censure, (ii) restitution of $28,237.85 to affected customers and (iii) certify that it implemented a supervisory system.