Ace Diversified Capital Inc. a securities broker dealer headquartered in San Gabriel California has been censured and fined $20,000.00 by Financial Industry Regulatory Authority (FINRA) based upon findings that (1) Ace failed to supervise recommendations of non-traditional exchange traded notes and exchange traded funds recommended by one of its stockbrokers (2) Ace neglected to supervise its trading practices to ensure that transactions were suitable for customers and (3) Ace failed to authorize and monitor the trading of options in a customer’s account by one of the firm’s stockbrokers. Letter of Acceptance Waiver and Consent No. 2016049183302 (Sept. 11, 2019).
According to the AWC, a stockbroker of Ace serviced the accounts of a high school teacher, MS, an appliance salesperson, OG, and a personal trainer, EO. The AWC stated that those customers’ annual incomes ranged from $50,000.00 to $100,000.00, and the net worth of those customers ranged from $20,000.00 to $100,000.00. FINRA noted that the customers had only moderate-to-aggressive tolerances for risk; and lacked experience as it pertained to complex securities.
FINRA reported that Ace allowed for sixty-five non-traditional exchange traded notes and exchanged traded funds to be recommended to customers MS, OG and EO by the stockbroker. FINRA particularly took issue with the risks of customers holding the alternative investments for periods of time extending beyond just one day. For example, MS’s account held a triple-leveraged exchange traded fund, Direxion Daily Natural Gas Related Bull 3X Shares (GASL), for ninety-four days; OG’s account held GASL for eighty-five days and EO’s account held the alternative investment for one hundred twenty-two days. The AWC stated that the stockbroker’s recommendations led OG and EO to incur losses.
FINRA stated that there was no supervision system, written supervisory procedures or trainings created and implemented by Ace so that stockbrokers were sufficiently trained on the suitability of non-traditional exchange traded note and exchange traded funds when held by customers for extended periods. The securities broker dealer barely touched on inverse and leveraged exchange traded funds in its training materials. FINRA determined that Ace’s supervisory failures led MS, OG and EO to hold overnight positions in exchange traded notes and exchange traded funds for unsuitable periods. FINRA found Ace’s conduct in this regard to be violative of FINRA Rules 2010 and 3110(a).
According to the AWC, Ace’s supervision was also deficient as it related to quantitative suitability. In fact, the securities broker dealer did not identify that a stockbroker excessively traded in customers’ investment accounts. Customers’ cost-to-equity ratios ranged from twenty-five percent to thirty-percent; and turnover rates ranged from eleven to twenty-three. There was no information contained in the firm’s written supervisory procedures which detailed how stockbrokers making recommendations would calculate turnover, change of equity, or profit and loss, or when transactions may indicate excessive trading. FINRA also noted that the securities broker dealer omitted information in its procedures concerning in-and-out trading. Ace’s conduct was violative of FINRA Rules 2010 and 3110(a) and 3110(b) in this respect.
The AWC also stated that options trades had been placed in OG’s account despite there being no qualified principal to review transactions. The firm additionally erred by not mandating a qualified options principal within the firm’s Los Angeles branch when trades were effected by more than three of Ace’s stockbrokers. FINRA found the firm’s activities in this regard to be violative of FINRA Rules 2010, 2360(b)(16)(A), 2360(b)(20)(A) and 2360(b)(20)(B).
