FINRA Orders Cetera Broker-Dealer to Pay Over $1 Million in Fines and Restitution
The Financial Industry Regulatory Authority fined Investors Capital Corporation, a broker-dealer within the Cetera Financial Group network, $250,000 over the sale of unit investment trusts. The broker-dealer, which did not admit or deny the findings, also agreed to pay $841,500 in restitution.
FINRA alleges that certain registered representatives at the company recommended unsuitable short-term trading of unit investment trusts and steepener notes in 74 customer accounts. The firm also allegedly failed to apply sales charge discounts to certain customers’ eligible purchases of UITs. FINRA said that the violations occurred because Investors Capital Corporation lacked adequate systems and procedures to supervise the sales of the aforementioned investments.
According to FINRA, UITs are generally intended as longer-term investments and typically carry sales charges that range from 2.5 to 3.5 percent of the purchase amount. Steepeners are complex, structured products that allow investors to bet on the shape of the yield curve. The return on this type of product is linked to the spread between longer- and shorter-term interest rates. They usually have long maturities, which can span 20 to 30 years, and the secondary market for steepeners may be illiquid or nonexistent.
From June 2010 through September 2015, two ICC representatives effected 971 short-term UIT transactions in 11 customer accounts. In some instances, the UITs were held for less than a month. FINRA said that many of the short-term transactions involved switching, where the representatives used sales proceeds from one UIT to purchase another. As a result of all of the unsuitable UIT recommendations, ICC customers suffered losses in the amount of approximately $242,900.
From April 2011 through December 2012, two ICC representatives recommended unsuitable short-term trading of steepeners in the accounts of 63 customers. In some instances, the steepeners were held for as little as one month. As the products’ prospectuses warned, the customers’ short-term trading of the products meant that they were sold at a discount in an illiquid secondary market. In total, these unsuitable steepeners recommendations resulted in losses of approximately $125,800.
From January 2009 through December 2013, ICC failed to identify and apply sales charge discounts to nearly 2,000 eligible UIT purchases resulting in customers paying excessive sales charges of approximately $472,900. FINRA said that ICC did not have an adequate supervisory system in place and relied solely on its registered representatives to ensure that customers received appropriate sales charge discounts. FINRA alleges that the reps were untrained and unmonitored with respect to sales charge discounts.
As previously reported by The DI Wire, Cetera is shutting down the broker-dealer and integrating select advisers into another firm within its network.
Investors Capital Corporation is headquartered in Lynnfield, Massachusetts, and employs approximately 640 registered persons, operating from approximately 313 branch offices.
