Cadaret Grant Co. Inc. is a FINRA member broker firm headquartered in Syracuse New York who has been censured and fined $800,000.00 by Financial Industry Regulatory Authority (FINRA) based on consenting to findings that it (1) failed to supervise its business practices with a view towards detecting and preventing bad investment recommendations (2) failed to supervise the recommendations of variable annuities made by Cadaret brokers and (3) failed to supervise its consolidated reports. Letter of Acceptance Waiver and Consent No. 2014039071101 (Sept. 11, 2018).
According to the AWC, there had been no supervision system created and maintained by the firm to ensure the suitability of securities recommendations made by registered representatives of the firm. The AWC stated that principals of the registered representatives were required under the firm’s procedures to review each customer’s suitability for a transaction. In reality, FINRA found that the firm’s supervisors were not able to adequately address this responsibility.
The AWC indicated that there were an insufficient number of supervisors staffed at the firm. In one case, a principal of the firm was responsible for managing three hundred twenty registered representatives. Apparently, the principals were not provided adequate exception reports or other tools meant to aid them in determining if Cadaret stockbrokers were effecting unsuitable trades.
The AWC stated that the principals were tasked with assessing suitability through a manual process; however, those procedures were insufficient in reference to the guidance on how the suitability review should be performed by supervisors to uncover possible unsuitable trading. FINRA determined that it was impossible for supervisors to conduct manual reviews of trades given the fact that thousands of them were effected daily.
According to the AWC, the procedures called for compliance personnel to conduct weekly reviews of the trade blotter in order to identify the existence of possible sales practice violations including churning and over-concentration. Yet, only three compliance representatives had been employed by the firm to conduct the manual reviews of the firm’s six hundred seventy-six representatives. Moreover, the compliance personnel were evidently not given adequate information about how to conduct those reviews. Worse yet, the firm’s trade blotter was also insufficient – it only reviewed transactions involving $10,000.00 or more. Consequently, only three percent of the trades had been reviewed by the compliance personnel. FINRA found the firm’s supervisory deficiencies in this respect to be violative of FINRA Rules 2010 and 3110 and National Association of Securities Dealers (NASD) Rule 3010.
The AWC additionally referenced that the firm did not adequately supervise recommendations of variable annuities. Particularly, between August of 2012 and August of 2016, over nine thousand variable annuity contracts had been sold by representatives to customers.
FINRA noted that the firm sold annuities containing several share classes, including B share contracts and L share contracts. The AWC stated that the L share contracts contained shorter surrender periods but higher costs than B shares. The firm was required under its training materials and supervisory procedures to provide registered representatives with guidance on which annuities were appropriate, if any, given the various costs and commitment periods for the share classes. Cadaret Grant’s supervisory failures evidently left representatives without the tools to present comparisons of share classes to customers before sales were consummated.
The AWC further added that insufficient guidance was provided to the registered representatives about combining L share contracts with long term income riders – an arrangement which FINRA believes may be inappropriate given the long term income riders requiring a longer commitment period from investors for them to obtain the full benefit.
In addition, the AWC stated the exchanges were not adequately supervised by the firm. Particularly, the firm did not utilize surveillance mechanisms to uncover if variable annuity exchanges were excessively effected by the registered representatives. The firm evidently depended on individual reviews of exchanges to ascertain if they were problematic. Yet, the principals responsible for conducting these reviews were seemingly deprived of the information about historical exchange rates, and left without exception reports or other tools that would enable them to make accurate determinations about excessive exchange rates. FINRA concluded that it was unreasonable for principals to be expected to identify the inappropriate variable annuity exchange rates. FINRA found that the firm’s supervisory failures pertaining to variable annuities was violative of FINRA Rules 2010, 3110 and 2330(d).
FINRA also found that the firm lacked supervision of its consolidated reports – documents provided to customers reflecting information about their assets held at Cadaret Grant and other institutions. The AWC stated that representatives were allowed by the firm to provide those reports to customers, and the firm gave the representatives the ability to make manual entries regarding the customers’ securities holdings and values. Evidently, more than three hundred representatives used those reports regularly.
The AWC revealed that the firm did not employ an adequate supervision system to identify the reports and review them for accuracy. In addition, the AWC stated that the firm did not implement procedures mandating the representatives’ retention of consolidated report documentation. Consequently, the firm’s conduct was found by FINRA to be violative of FINRA Rules 2010 and 3110.
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