Broker-Dealer Fined for Disclosure and Supervisory Failures on "Complex Product" Recommendations

A broker-dealer settled FINRA charges for omitting material facts in communications with customers and failing to supervise recommendations on "complex products".

In a Letter of Acceptance, Waiver, and Consent (the "AWC"), FINRA found that the broker-dealer failed to (i) conduct any due diligence on the alternative mutual fund to ensure that the representatives understood the "complex product's" specific risks and features, including that the fund’s strategy relied in part on uncovered options, (ii) disclose to investors that the issuer had failed to make timely and material filings with the SEC, and (iii) implement a reasonable supervisory system with respect to recommendations of the alternative mutual funds. FINRA said that the investors were harmed when the fund’s value dropped by 80 percent and the fund was ultimately closed. FINRA concluded that the broker-dealer violated FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade").

To settle the charges, the broker-dealer agreed to (i) a censure, (ii) a $100,000 fine, (ii) pay restitution and interest to the customers who purchased the funds and (iv) comply with the undertaking set forth in the AWC.