FINRA Fines Broker-Dealer $200,000 for Rep’s Unsuitable Non-Traded REIT Sales
Financial Industry Regulatory Authority (FINRA) has ordered Independent Financial Group to pay a $200,000 fine for failing to "reasonably supervise" one of its former registered representatives.
Financial Industry Regulatory Authority (FINRA) has ordered Independent Financial Group (IFG) to pay a $200,000 fine for failing to “reasonably supervise” one of its former registered representatives who recommended that his customers concentrate their retirement assets and liquid net worth in non-traded real estate investment trusts and structured notes.
According to a letter of acceptance, waiver, and consent issued by FINRA, from January 2008 through March 2016, an unnamed registered representative solicited dozens of customers who were retiring or had retired to liquidate their 401(k) and pension plans to “make hundreds of investments” in non-traded REITs and structured notes. Many of the customers had little or no investment experience and had never purchased alternative investments, the regulator said.
In one example provided by FINRA, a 71-year-old customer had an investment objective of growth and a conservative risk tolerance. Although the customer’s new account documents did not allow for speculation, 50 percent of his liquid net worth was invested in non-traded REITs and structured notes. His first purchase was a $141,000 investment in a single non-traded REIT.
FINRA claims that between January 2008 through November 2014, IFG did not explicitly limit concentration levels of alternative investments in customer accounts, but instead, required the completion of a suitability questionnaire for each alternative investment purchased.
According to FINRA, an IFG supervisor reported irregularities and concerns relating to the rep’s recommendations. For example, there were reportedly discrepancies with his customers’ new account documents, suitability questionnaires and questionable asset allocations. In addition, numerous complaints and customer arbitrations were filed against the rep beginning in 2012 and continuing throughout his association with the firm.
FINRA said that although these events resulted in the firm twice implementing a heightened supervision plan for the broker, neither plan was “reasonably” executed. Specifically, FINRA noted that the firm performed quarterly office inspections, but did not respond to red flags that were observed in the course of those inspections including potentially altered new account and transaction forms, customer signatures that did not match, and ineligible accounts purchasing alternative investments.
In addition, the heightened supervision plan required a principal to review and approve the rep’s new account forms before an account was accepted and opened. Although IFG placed calls to certain of customers as part of that process, it did so after the accounts were opened, FINRA noted.
One of the supervisors documented issues relating to the rep’s misconduct in his notes, which he shared with others at the firm including individuals within the compliance department, FINRA said. The notes highlighted concerns such as the use of corrective tape and liquid paper on account documents, trades being potentially mis-marked as unsolicited, customer signatures that did not match, questionable changes to customer risk tolerances, and potentially unsubstantiated increases in a customer’s net worth. However, FINRA claims that the firm permitted the broker to continue to sell non-traded REITs and structured products to his customers.
Later, another supervisor who was unaware of the prior pattern of paperwork irregularities and the rep’s growing number of customer complaints and arbitrations, began supervising the broker and implemented another heightened supervision plan.
In November 2014, the firm implemented new policies concerning alternative investments, including establishing concentration guidelines for alternative investments based on a customer’s age and net worth. They also had mandatory product specific training on alternative investments for the firm’s reps, which supplemented its general product training.
However, FINRA said that even with the new guidelines, the broker continued to recommend non-traded REITs to customers, with some exceeding the new concentration limits.
FINRA noted that the rep’s new supervisor would occasionally raise questions related to incomplete or stale paperwork or the suitability of certain recommended transactions. However, the issues were typically resolved by gathering or amending transaction documentation and not by acting on the red flags suggesting potentially unsuitable sales, the regulator said.
In addition to the censure and fine, IFG must certify in writing to FINRA that the firm has implemented supervisory systems and procedures to address all areas of conduct identified by FINRA and must achieve compliance with suitability requirements for alternative investments.
IFG, which signed the AWC letter without admitting or denying FINRA’s findings, is headquartered in San Diego and has approximately 660 registered representatives and 370 branch offices.
