American Independent Securities Group LLC (AISG) a securities broker dealer headquartered in Eagle Idaho together with AISG securities principals Ryan Carlson and Nicholas Cioffi have been sanctioned by Financial Industry Regulatory Authority (FINRA) based upon findings that they failed to supervise the sales of collateralized mortgage-backed securities (CMOs) resulting in losses to customers. Letter of Acceptance Waiver and Consent No. 2018060267902 (Mar. 29, 2021).
According to the AWC, between October of 2014 and April of 2017, written supervisory procedures of AISG called upon Carlson to create and implement reasonable supervision systems and procedures. But Carlson neglected to create and implement supervisory procedures as it pertained to the suitability of CMO recommendations and transactions.
FINRA stated that AISG lacked a reasonable procedure for evaluating whether inverse floating rate CMOs were suitable for investors. There was no process for assessing what would be considered suitable for CMO transactions. No guidance existed for identifying who these products should be offered to, or how much of investors’ accounts could be concentrated in them. FINRA determined that Carlson and the securities broker dealer violated FINRA Rules 2010 and 3110 in addition to National Association of Securities Dealers (NASD) Rule 3010.
FINRA next determined that an AISG stockbroker was not supervised by AISG and Nicholas Cioffi. The AWC stated that Cioffi was supposed to review and authorize new accounts. He was additionally tasked with monitoring stockbrokers’ trading activities. But he did not carry out these responsibilities with respect to one or more stockbrokers. Red flags regarding one stockbroker had been overlooked by Cioffi resulting in the stockbroker’s seemingly unsuitable recommendations of inverse floaters.
The regulator confirmed that customer accounts which were serviced by this stockbroker had been completely concentrated in inverse floaters. This prompted the securities broker dealer’s trade review system to present a red flag for overconcentration. The AWC also stated that customers of this stockbroker were elderly and had limited net worth and income. The stockbroker disregarded customers’ risk tolerance, investment experience, and financial circumstances as he told them all to buy the same CMOs.
FINRA stated that there were no steps taken by Cioffi to reasonably investigate concerns about the stockbroker. Only in rare instances did he scrutinize a transaction. No customers affected by the stockbroker had been contacted by Cioffi. There was also no attempt by Cioffi to elevate his concerns about that stockbroker to the senior management personnel at AISG. FINRA found that his conduct was violative of FINRA Rules 2010 and 3110 as well as NASD Rule 3010.
The AWC also reveals that there were no reasonable steps taken by Carlson and AISG to make sure that the duties of Cioffi were carried out. Carlson and AISG also failed to take appropriate action despite red flags which suggested that the AISG stockbroker made unsuitable recommendations.
Carlson knew troubling information about the stockbroker including that he recommended inverse floaters to investors who maintained conservative investment objectives. He was aware of the stockbroker’s control over those customers’ accounts where he exclusively invested in inverse floaters.
The AWC additionally stated that Cioffi was known by Carlson to lack training on CMOs and inverse floaters. When the trade review system sounded the alarm on the stockbroker’s trading, Carlson did nothing to address suitability issues. FINRA determined that Carlson and AISG ran afoul of FINRA Rules 2010 and 3110 and NASD Rule 3010 for this reason.
FINRA also indicated that senior accounts and discretionary accounts were not reasonably supervised by Carlson and AISG. They were supposed to monitor discretionary accounts on a continuous basis. Carlson was responsible for ensuring that the customers’ suitability information was taken into account prior to discretionary accounts being established for them. Accounts were supposed to be reviewed to ensure the suitability of recommendations and to ensure that accounts were not overconcentrated. Carlson was even responsible for seeing that an annual review of senior accounts had been conducted to assess whether transactions were inconsistent with customers’ objectives for investing or liquidity needs.
The AWC stated that suitability concerns pertaining to the AISG stockbroker would have been detected had Carlson properly supervised discretionary accounts and senior accounts. Carlson’s and AISG’s failure to supervise in this respect was violative of FINRA Rules 2010 and 3110 in addition to NASD Rules 3010 and 2510(c).
Most inverse floaters were sold by the AISG stockbroker by June of 2017, resulting in customers’ collectively incurring more than $2,000,000.00 in realized losses.
AISG has been censured by FINRA. Carlson was fined $10,000.00 and suspended as principal for 60 days. Cioffi was suspended as principal for 45 days.
