In this month’s FINRA Disciplinary Actions roundup, we saw countless examples of FINRA zoning in on financial representatives for making unsuitable investment recommendations to their clients.
FINRA found numerous instances of representatives excessively trading client accounts, improperly using margin, churning accounts, and engaging in other practices solely to generate commissions and fees for themselves, without regard for client investment objectives.
In many cases, these unsuitable recommendations caused significant losses for clients, especially seniors and unsophisticated investors. The actions highlighted show FINRA continuing to crack down on representatives who engage in trading practices that improperly take advantage of clients for their own financial gain.
Rep Fined/Suspended for Excessive and Unnecessary Fees and Costs
A representative from New York, New York was assessed a deferred fine of $11,500 and suspended from association with any FINRA member in all capacities for nine months due to the findings that he recommended transactions in a customer’s account that inflated his own compensation and caused the customer to incur unnecessary fees and costs, without a reasonable basis to believe the transactions were suitable.
The findings stated that the customer was 48 years old when he started investing with the representative and depended on the investment assets for the rest of his life because he was no longer able to work after a disabling accident. The representative recommended that the customer purchase and sell securities in ways that caused him to pay commissions or incur fees, which he received, that could easily have been avoided.
For example, the representative had recommended the purchase of approximately $1.4 million in market-linked investments (MLIs) for which he received a fee. Shortly thereafter, he moved these MLIs to another account, resulting in another fee that the customer paid, and he received. In addition, he recommended selling approximately $550,000 of MLIs and using the proceeds of the sales to purchase other securities in a way that caused the customer to incur approximately $7,550 in total commissions.
Still further, the representative recommended to the customer the liquidation of over $1.1 million and the purchase of over $1 million of different exchange-traded funds (ETFs). These transactions generated approximately $25,000 in total commissions. In each case, the representative could have recommended the transactions in a different manner that would have avoided unnecessary and unwarranted fees and commissions.
The findings also stated that he engaged in short-term trading, including in securities typically intended to be held long-term, to his benefit and his customer’s detriment, and without a reasonable basis to believe that the recommended transactions were suitable for the customer. Furthermore, the representative engaged in frequent, unsuitable transactions in master limited partnerships (MLPs), generating additional and unwarranted fees.
Rep Suspended for Unsuitable Trading in Senior Customer’s Account
In a similar case, a representative from Brooklyn, New York was suspended from association with any FINRA member in all capacities for 10 months due to the findings that he unsuitably and excessively traded a senior customer’s account.
The findings stated that the representative engaged in quantitatively unsuitable trading in the senior customer’s account resulting in a high turnover rate, high annualized cost-to-equity ratio, and significant losses. The representative’s trading in the customer’s account generated total trading costs of $206,667, including $189,446 in commissions, and caused $51,959 in realized losses.
The representative’s customer routinely followed his recommendations to engage in high frequency trading and, as a result, he exercised de facto control over the account. His trading in the customer’s account was excessive and unsuitable given the customer’s age and investment profile.
“Unsophisticated Investors” Feel Impact of Unsuitable Trading Advice
A representative from Venice, California was fined $10,000, suspended from association with any FINRA member in all capacities for two months, and ordered to pay $33,374.31, plus interest, in restitution to a customer. The representative is required to pay restitution to only one customer, as the other customer at issue separately settled an arbitration claim in which he was awarded restitution.
Without admitting or denying the findings, the representative consented to the sanctions and to the entry of findings that he recommended unsuitable use of margin to effect trades in the accounts of two customers who were not sophisticated investors causing them to pay more than $46,000 in commissions, fees, and margin interest.
The representative recommended the use of margin in his customers’ accounts to leverage additional buying power while also employing a short-term trading strategy. He frequently recommended that his customers buy securities on margin and, after holding the positions for a short time, then sell those securities, often incurring realized losses in addition to trading costs and margin interest.
In addition, the margined positions often experienced price declines, causing the accounts to incur margin calls, which were often met by selling securities at a loss. His recommendations to engage in unsuitable trading on margin exposed his customers to significant risk, increased costs, and sizeable losses in their accounts.
The representative lacked a reasonable basis to believe that using margin in this way was suitable given the customers’ investment objectives, financial situation, and needs. Neither customer had prior experience using margin and both followed his recommendations for trading in their accounts. As a result of his recommendations one customer, a retired repairman, had realized and unrealized trading losses of $22,486.27 and the second customer, an IT account manager, had realized and unrealized trading losses of $58,050.27.