Alton Securities Group, Inc. located in Alton, Illinois, was censured and fined $75,000.00 by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm had an inadequate supervisory system pertaining to non-traditional exchange traded funds and non-traditional mutual funds, caused unsuitable recommendations to be made to customers, and caused excessive markups/markdowns on municipal debt and corporate debt transactions. Letter of Acceptance, Waiver and Consent, No. 2013035045903 (Feb. 18, 2016).
According to the AWC, from February 2009 through June 2013, the firm failed to supervise sales activities of its stockbrokers. The only supervision that FINRA found that the firm provided pertained to a review of the firm’s trade blotter on a daily basis pertaining to the stockbrokers’ sales. The AWC stated that the firm’s trade blotter was void of facts pertaining to the age, risk tolerance, investment objectives, and suitability information of customers. The firm, according to FINRA, had also failed to monitor the accounts of customers in order to detect any red flags, and had no procedure for exception reports to be utilized in the supervision of sales.
The AWC stated that there was no supervision provided by the firm in reference to non-traditional exchange traded funds and other mutual funds that the firm offered through stockbrokers. These types of securities are designed to return a multiple, inverse, or inverse-multiple of a benchmark index over one trading day. The AWC stated that FINRA, via Regulatory Notice 09-31, considered that non-traditional exchange traded funds are typically unsuitable for retail investors planning to hold the securities for more than one trading session. Alton Securities reportedly sold the non-traditional exchange traded funds to many customers who held the securities for a greater period of time than one trading session.
The firm reportedly failed to implement supervisory systems associated with the markups/markdowns pertaining to transactions of corporate debt. According to the AWC, the firm only generally discussed such topic, but never implement procedures concerning the firm’s business in this regard. Alton Securities was found by FINRA to have violated FINRA Rule 2010, MSRB Rule G-27, and NASD Rule 3010(a) as a result of their supervisory failures.
The AWC stated that six hundred forty-two purchases of non-traditional exchange traded funds were made in two hundred twenty-five of the firm’s accounts as a result of the recommendations made by the firm’s stockbrokers. The stockbrokers, meanwhile, apparently failed to receive proper training regarding the non-traditional exchange traded funds and non-traditional mutual funds with respect to features and risks. The firm’s stockbrokers reportedly sold certain non-traditional products to conservative investors. This reportedly caused customers to realize losses on the transactions. FINRA found that the firm’s conduct in this regard was violative of FINRA Rule 2010 and 2111, as well as NASD Rule 2310.
Alton Securities was also cited in the AWC for excessively charging customers on corporate debt transactions. The AWC stated that the firm’s markups/markdowns ranged from 3.02 – 4.73%. FINRA found the firm to be in violation of NASD Rule 2440 and Rule 2010 as a result of not charging fair markups/markdowns in fifty-four transactions. The AWC stated that Alton Securities also charged unfair and unreasonable markups/markdowns in one hundred four municipal bond transactions, which ranged from 3.01% – 4.53%. The firm was found to have violated MSRB Rule G-30 in this regard.
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