Jeffrey Davidson of Stuart, Florida, a stockbroker with American Portfolio Financial Services, was suspended from association with any Financial Industry Regulatory Authority (FINRA) member firm in any and all capacities for three months and fined $10,000 after consenting to findings that he engaged in unsuitable mutual fund switching in customer accounts. Letter of Acceptance, Waiver and Consent, No. 2013039482702 (Jan. 6, 2016).
According to the AWC, from May 2011 through May 2013, Davidson had recommended forty-nine unsuitable mutual fund switch transactions in twelve customer accounts. One of the customers who Davidson had made such unsuitable recommendations to was ninety-seven years old, and five other investors were sixty-five years old and over.
The AWC indicated that all of the transactions had involved Davidson’s recommendation to purchase Class A mutual fund shares and to subsequently sell those shares within less than a year of the purchase, despite there being significant upfront costs associated with the purchase of Class A shares, and the fact that the Class A shares are generally intended to be held long term. The AWC further reported that Davidson had recommended that the customers use the proceeds of the sales in order to purchase new Class A mutual fund shares, in most cases in different mutual funds from different fund families, which caused the customers to pay additional sales and commissions.
FINRA found that collectively, Davidson’s customers had incurred an estimated $46,000 in unnecessary sales charges coming as a result of the unsuitable recommendation(s). The firm reportedly paid the customers back for their losses. FINRA found that Davidson had violated NASD Conduct Rule 2310, IM-2310-2, and FINRA Rules 2111 and 2010.
FINRA Conduct Rule 2111 provides that a member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.
A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
Prior to the recommendation of any security, the broker must first understand the risk and characteristics of the securities being recommended, and whether that security is suitable for any customer. The second step, in connection with the recommendation of a particular investment or investment strategy, is to determine whether the transaction is suitable for that particular customer.
Firms and individuals, not surprisingly, are prohibited from unauthorized use of customer funds, borrowing of a customer’s securities or funds, forgery, non-disclosures or misstatements of material facts, and various deceptions and manipulations. Such conduct can also be found to violate criminal and other civil laws, and be subject to sanction from the federal and state government bodies.
Public disclosure records via FINRA’s BrokerCheck reveal that Davidson has been subject to at least five disclosure incidents. On March 18, 1991, Davidson settled a customer dispute for $22,600 after the client had claimed that an investment purchased was not suitable. On February 14, 1994, Davidson settled a customer dispute for $12,500.00 after the claimants had alleged that the purchase of limited partnerships were unsuitable for them, and the risks of the investments were not fully disclosed.
On October 19, 1995, Davidson settled a customer dispute for $75,000 after claimants alleged suitability, misrepresentation, omission of facts, and account related failure to supervise. On January 25, 2010, Davidson became subject to a pending customer dispute, where claimants are requesting $200,000.00 after alleging breach of fiduciary duty, negligence, supervision, misrepresentation, breach of contract, and violation of Securities Investor Protection Act.
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