Berthel Fisher Company Financial Services, a securities broker-dealer headquartered in Cedar Rapids, Iowa, has been censured and fined $100,000.00 by Financial Industry Regulatory Authority (FINRA) based in part on findings that it recommended unsuitable options to a customer and failed to supervise options trading in customer accounts. Letter of Acceptance, Waiver, and Consent No. 2018057425202 (April 26, 2022).
According to the AWC, from August 2015 to February 2018, 28 unsuitable options transactions were recommended by a Berthel Fisher stockbroker. The AWC states that this included purchases of 22 call or put options, which caused the customer to risk losing their entire premium to the extent that options expired worthless. FINRA states that the options recommendations were not appropriate for the customer given the customer’s investment experience, financial situation, age, and the amount of risk that the customer would face. The regulator notes that the investor had no experience with options.
As an example, the customer was advised to make 17 purchases of call and put options on index fund QQQ from August 2015 to December 2016. The strategy used by this stockbroker involved buying options in the customer’s account and then reselling them for profit rather than exercising the options. The AWC states that some options were resold at a loss. FINRA notes at least four occasions where the customer’s options expired with no value, which produced $20,000 in losses. The customer’s account declined from $120,000.00 to around $37,000.00 because of the 17 options transactions.
FINRA states that between August 2015 and February 2018, the 28 total options transactions generated more than $31,000.00 in losses.
FINRA states that Berthel Fisher recommended unsuitable trades in violation of FINRA Rules 2010, 2360(b)(19), and 2111.
The regulator also found that Berthel Fisher failed to supervise options trades. From August 2015 to February 2018, its written supervisory procedures were not enforced. The securities broker-dealer also did not create and implement an adequate supervisory system relating to options trading. For example, Berthel Fisher approved options recommendations for the customer’s account despite red flags suggesting that the transactions were not suitable. The securities broker-dealer did not take into account the decline in the customer’s account value because of options trades or the frequency and size of the transactions. The company overlooked how much of the customer’s account was concentrated in options.
FINRA also notes that Berthel Fisher had guidelines for options trading based on net worth and income, but the company did not apply the guidelines to this customer. And principals were not provided with options training to assist with their review of transactions for suitability. This resulted in the firm not detecting unsuitable trades or taking the appropriate steps to address them. Berthel Fisher violated FINRA Rules 2010, 2360(b)(20)(A), and 3110.
