Firm Supervisor Settles FINRA Charges Over Risky Retail Investment Recommendations
A firm's Principal/Chief Compliance Officer settled FINRA charges for failing to supervise two registered representatives' on their recommendations of risky products to retail customers.
According to the Letter of Acceptance, Waiver, and Consent, the principal failed to reasonably review a registered representative's recommendations of speculative, unrated corporate debt securities to four retail customers during the relevant period. FINRA determined that the representative recommended the customers "invest a total of $335,000" in these alternative investment products, despite application documents indicating the customers had moderate risk tolerances, non-speculative investment objectives, and existing high concentrations in alternative investments. FINRA found that three of the four customers were seniors, and the principal approved the transactions without taking steps to confirm the representative had a reasonable basis for the recommendations.
FINRA also found the principal failed to reasonably oversee a second representative's recommendations of non-traditional exchange-traded products (NT-ETPs) to four retail customers during the relevant period. The representative recommended the customers, who ranged in age from 57 to 92, invest approximately $45,000 in daily-reset NT-ETPs and hold them for longer than a single day. FINRA determined that the principal failed to apply heightened scrutiny to these complex product recommendations or verify that they aligned with the customers' moderate risk tolerances and intended holding periods.
FINRA found the principal violated FINRA Rule 3110 ("Supervision") and Rule 2010 ("Standards of Commercial Honor and Principles of Trade") by failing to reasonably supervise the representative's recommendations and evaluate whether they were in the customers' best interest Exchange Act Rule 15l-1(a)(1) ("Reg Best Interest").
To settle the matter, the principal agreed to (i) a one-month suspension from associating with any FINRA member in all principal capacities, (ii) pay a $5,000 fine and (iii) to requalify as a principal by passing the requisite examinations.