Firm Settles Charges for Improper Sales of "Steepeners"
Commentary by Jeff Ziesman
A firm settled FINRA charges for failing to properly supervise the sale of variable rate structured products ("VRSPs"), including steepeners, to retail customers.
According to the AWC, the firm's representatives advised clients to purchase "steepeners"—financial instruments that typically pay interest at an above-market rate at the beginning of the term and eventually transition to a floating interest rate that is less than the initial term rate—to 12 customers who had low or moderate risk tolerances. FINRA also found that eight other customers were allowed to hold VRSPs in concentrations amounting to at least 25 percent of their liquid net worth. FINRA said these concentrated positions were unsuitable for the clients, given the risk of losing principal and the illiquidity of the products. The 12 customers with unsuitable recommendations suffered realized losses of $34,576.33, while the eight customers with high concentrations paid $43,160 in sales charges.
FINRA found that the firm failed to implement adequate supervisory procedures and processes to monitor these recommendations, violating FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to (i) a censure, (ii) a $50,000 fine and (iii) restitution of $77,736.33 plus interest to affected customers.
Commentary
This case is fascinating in a number of respects. First, the Relevant Period for the alleged misconduct begins in January 2015, almost 10 years ago. Second, the end of the Relevant Period is December 2019, nearly 5 years ago. Third, the FINRA Matter Number begins with "2023," suggesting the matter was opened some 3 years after the alleged misconduct ended. Bottom line: the alleged misconduct was ancient at the time the investigation was opened, and even more ancient in September 2024.
Apart from the staleness issues, this case is a relatively straightforward sales practices case involving another type of purported "complex product"—in this case, variable rate structured products ("VRSPs"). Put simply, these products are tied to interest rates (initially fixed, and the becoming a variable rate), and have longer maturities. VRSPs may have liquidity issues, and investors could lose principal on their investment in VRSPS.
FINRA found at least 2 problems with the firm's sales of these products to retail customers. First, certain of the customers had either low or moderate risk tolerances, and FINRA implied that sales of VRSPs was inherently unsuitable for these customers (irrespective of volume). Second, for certain other customers, FINRA found that the firm sold VRSPs to these customers in such volumes that there were concentration issues. These customers held VRSPs in their accounts in quantities of at least 25 percent of their liquid net worth. Given the lack of liquidity, lack of a secondary market, and the potential for losing principal, FINRA found that these transactions (at least the volume) were unsuitable for this second group of customers, as well.