FINRA Suspends Broker for Unsuitable Bond Sales to Elderly Customer

FINRA suspended a broker for recommending complex mortgage-backed bonds to an elderly customer. 

According to the AWC, a 95-year-old customer opened an account with a broker's firm, funded with $75,000 from the sale of his home. FINRA stated that the customer's daughter—acting under a power of attorney—told the broker she wanted an investment with no principal risk, a term of no more than one year, and a return higher than a bank CD. FINRA highlighted that the daughter also explained that her father had no prior fixed-income experience and held a conservative investment objective of "income with capital appreciation."

FINRA found that the broker recommended the purchase of four GNMA support class bonds totaling about $71,000 which generated over $400 in commissions. FINRA noted that these bonds were part of a complex mortgage-backed security structure known as a Real Estate Mortgage Investment Conduit ("REMIC"). FINRA explained that a REMIC pays principal to investors in a set order, with higher-priority classes paid before support class bonds, meaning that if interest rates rise and mortgage repayments slow, payments to support classes may be diverted to higher-priority classes and their market value will likely fall.

FINRA stated that the broker lacked a reasonable basis to believe the bond recommendation was in the customer's best interest, given the customer's "age, risk tolerance, and liquidity needs." FINRA highlighted that the broker failed to review the prospectuses or consider key risks, such as principal repayment priority and sensitivity to interest rate changes. FINRA stated that after the purchase, rising interest rates resulted in no principal repayments and a decline in the bonds' value, causing the customer to incur roughly $19,000 in losses. 

FINRA determined that the broker violated Exchange Act Rule 15l-1 ("Regulation Best Interest") and Rule 2010 ("Standards of Commercial Honor and Principles of Trade"). 

To resolve the matter, the broker consented to a four-month suspension from associating with any FINRA member in any capacity, a $5,000 fine, and disgorgement of $402.58 in commissions plus interest.