Calton Associates Inc. a securities broker dealer headquartered in Tampa Florida has been censured and fined $250,000.00 by Financial Industry Regulatory Authority (FINRA) supported by findings of Calton Associates failing to supervise sales of volatility-linked exchange traded products which resulted in customers’ experiencing losses on unsuitable transactions. Letter of Acceptance Waiver and Consent No. 2018060466201 (May 17, 2021).
According to the AWC, between February of 2014 and February of 2020, Calton Associates maintained inadequate supervision systems and written supervisory procedures as it pertained to the sale of volatility-linked exchange traded products and non-traditional exchange traded products. Those products are meant to be held for short periods. They are meant for active trading strategies.
The firm failed to gear its supervisory system and written supervisory procedures towards complying with FINRA’s suitability standards. There was no supervision system used by the securities broker dealer that addressed volatility-linked exchange traded products. There was no mention of those products in any written supervisory procedures used by the firm. Stockbrokers were not provided with trainings as it pertained to those products either.
The only time that sales of volatility-linked exchange traded products had been reviewed was when the product was leveraged. But the reviews undertaken by Calton Associates failed to identify known risks inherent in the investments.
In January of 2017, Calton Associates told FINRA that it placed restrictions on non-traditional exchange traded product trades. The securities broker dealer told FINRA about its new disclosure documents which customers would be required to complete if effecting transactions. The regulator was told that stockbrokers would get trained on non-traditional exchange traded products in 2017. But there were no restrictions set in place by Calton Associates. The disclosure document was only periodically provided for customers to complete. Stockbrokers did not receive the training in 2017 as the securities broker dealer promised. They were not reasonably educated on the risks and features of those products.
Most supervisory procedures relating to non-traditional exchange traded products that were set in place in April of 2015 had been eliminated by the securities broker dealer in November of 2017. New procedures called upon stockbrokers to determine the suitability of transactions before recommending them. Supervisors were required to review the transactions to ensure suitability. But between February of 2014 and February of 2020, supervisors overlooked the reviews of those non-traditional exchange traded product transactions because Calton Associates did not have sufficient systems for identifying them.
FINRA also mentioned that there was an insufficient system used by Calton Associates for purposes of identifying the holding periods on non-traditional exchange traded products. The securities broker dealer relied upon supervisors’ manual reviews. This was inadequate.
The AWC stated that from February of 2014 to February of 2020, prior to non-traditional and volatility-linked exchange traded products being offered to customers, there was no reasonable due diligence undertaken by Calton Associates concerning risks and features. This caused stockbrokers to sell those products without having any sufficient understanding of the risks and features. Stockbrokers did not even know that the investments were meant to be held on a short term basis. Customers held non-traditional exchange traded products for extended periods resulting in losses.
Calton Associates violated FINRA Rules 3010 and 2010 for failing to supervise sales of non-traditional and volatility-linked exchange traded products. The securities broker dealer violated FINRA Rules 2111 and 2010 for making unsuitable investment recommendations.