Suitability

FINRA HITS AN FA FOR REASONABLE-BASIS SUITABILITY VIOLATION WITH NON-TRADITIONAL ETFs

July 7, 2021 | Herskovits, PLLC

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An AWC issued on July 1, 2021, reflects that FINRA suspended an FA formerly registered with David A. Noyes & Company (now known as Sanctuary Securities) for three-months and imposed a deferred fine of $5,000. This AWC demonstrates FINRAs ongoing concerns around the sale of leveraged and inverse exchange traded funds to retail customers. This week’s AWC is the book-end to an AWC issued in May 2021 against Sanctuary for a variety of violations, including the failure to establish, maintain and enforce a supervisory system designed to meet FINRAs suitability standards for non-traditional ETFs. Sanctuary was fined $160,000 and ordered to pay customer restitution of $370,161.

By way of background, the broker-dealer permitted FA Stuart Pearl to resign in March 2019. According to statements on BrokerCheck, Mr. Pearl resigned while on heightened supervision and the firm alleged that Mr. Pearl had not followed the heightened supervision plan.

Product at Issue: Non-Traditional ETFs

FINRA Attacks Suitability By Challenging FAs Product Knowledge

January 6, 2020 | Herskovits, PLLC

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On January 3, 2020, FINRA released an AWC for Robert James D’Andria, Case No. 2017056579502. At first blush the AWC seems rather plain vanilla. The FA recommended high-risk products, in this case leveraged and inverse exchange-traded notes and funds, to retail investors and FINRA deemed those recommendations to be unsuitable. FINRA suspended the FA for 2 months and fined him $5,000.

In a typical suitability case, FINRA would claim that the account was over-concentrated in a given sector, or the position was too large relative to the portfolio as a whole, or the account was over-traded, or the investment was inconsistent with the investor’s stated investment objectives. And, in a typical case, FINRA would claim that the customer suffered meaningful losses.

In this AWC, however, FINRA does not claim that the investments were inconsistent with the customers’ investment objectives. Nor does FINRA claim that the investors were unsophisticated or otherwise lacked the ability to assess the merits of these investments. So, this begs the question: where’s the violation?

FINRA ACCUSES NY LIFE OF FALSIFYING CUSTOMERS’ INVESTMENT OBJECTIVES: OUCH

November 21, 2019 | Herskovits, PLLC

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FINRA wants a member firm to enforce its written supervisory procedures. And FINRA wants a member firm to recommend securities that fit within the customer’s investment objectives. And certainly FINRA wants a member firm to avoid falsification of business records. So what happens when a member firm doesn’t quite live up to FINRA’s expectations? Let’s play the over / under game and try to guess the size of the FINRA sanction when a member engages in the following misconduct:

Failure to enforce WSPs governing the sale of high-risk mutual funds subject to significant volatility
Failure to reallocate portfolios to reduce risk or otherwise update investment objectives to correspond with the assumption of additional risk