Berthel Fisher Co. Financial Services Inc. is a broker-dealer headquartered in Cedar Rapids Iowa that has been censured and fined two hundred and twenty-five thousand dollars according to an Office of Hearing Officers Order Accepting Offer of Settlement containing findings that the firm failed to supervise unit investment trust transactions effected in customer accounts. Department of Enforcement v. Berthel Fisher And Co. Financial Services Inc. Disciplinary Proceeding No. 2014039169601 (Feb. 5 2018).
According to the Order, from January 1, 2013 to December 31, 2014, the firm’s stockbroker, Jeffrey Dragon, recommended and ultimately executed unsuitable trades of unit investment trusts in customer accounts, enabling Dragon and the firm to accumulate $417,000.00 in concessions. Apparently, twelve customers had been advised to submit to Dragon’s trading strategy, which involved the premature liquidation of unit investment trusts that Dragon recommended customers’ purchase just months before.
The Order stated that Dragon recommended that customers take proceeds from premature sales to effect purchases of new unit investment trusts. Evidently, customers incurred sales charges each time that they purchased a new unit investment trust at Dragon’s direction. FINRA concluded that Dragon’s recommendations were not suitable based upon the costs customers incurred in trading unit investment trusts, as those products were not designed for active trading.
The Order further stated that Dragon’s strategy precluded customers from obtaining sales charge discounts when purchasing unit investment trusts. Apparently, the transactions that Dragon recommended were structured so that customers would be purchasing the unit investment trusts over multiple days and in amounts that had been under the breakpoint threshold. As a result, Dragon reportedly raked in concessions at the expense of his customers.
Evidently, the firm’s allowance of Dragon’s trading enabled the firm to profit; however, his activities only persisted because of the firm’s failure to adequately supervise trading of unit investment trusts. The Order stated that the firm only conducted manual reviews of the firm’s trade blotters when supervising customer activity and recommendations of unit investment trusts, but those manual reviews did not address the length of time that unit investment trusts had been held by customers before the investments had been liquidated. The blotters also reportedly failed to address the source of customers’ funds utilized in making new unit investment trust purchases. FINRA concluded that the firm’s supervision systems had not been adequately designed to avert unit investment trust trades executed on a short-term and possibly excessive basis.
Moreover, FINRA found that the firm’s supervision system was flawed because it was not adequately geared to avert mutual fund trades effected on a short-term and excessive basis. Apparently, between January 1, 2013 and December 31, 2015, no tools, reports, or methods had been incorporated into the firm’s supervision system to detect improper switching of mutual funds.
Further, the Order stated that the firm’s supervision systems were not sufficiently capable of making sure that customers had been provided sales-charge discounts when mutual fund and unit investment trust trades were executed in their accounts. The firm reportedly depended on its clearing firm and registered representatives to make determinations, but it never checked if those discounts had been correctly applied. The Order revealed that between 2010 and 2014, at least two thousand seven hundred customers were deprived of sales charge discounts. Consequently, customers overpaid by $667,000.00, and most of that amount had been provided to the firm as well as the firm’s registered representatives by way of dealer concessions.
FINRA concluded that the firm violated FINRA Rules 2010 and 2111 for the unsuitable trading which had transpired, and FINRA Rules 2010 and 3110 for failing to supervise the firm’s trading practices.
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