Capital City Securities LLC a securities broker dealer headquartered in Powell Ohio has been censured by Financial Industry Regulatory Authority (FINRA) based upon findings that Capital City failed to supervise the suitability of trades that its stockbrokers effected in customer accounts. Letter of Acceptance Waiver and Consent No. Letter of Acceptance Waiver and Consent No. 2015048347902 (Sept. 23, 2020).
According to the AWC, from August of 2015 to June of 2016, Capital City did not create or implement an adequate supervision system or set of written supervisory procedures with a view towards complying with FINRA’s rules as it related to suitability. The securities broker dealer depended on an automated trade surveillance application for supervision but this tool was not configured or updated to address problematic strategies that were implemented by its stockbrokers.
Capital City’s supervision of stockbroker Clint H. Keener’s trades involved an inadequate analysis of the stockbroker’s recommendations since this method of supervision involved reviewing each option or equity transaction alone rather than collectively to determine suitability. The supervision system also did not take into account when Clint H. Keener made recommendations to the same customer or had effected an active trading strategy. The AWC stated that Capital City supervisors failed to uncover problematic trading patterns which meant that it did not rigorously evaluate whether Clint H. Keener’s trading strategy was unreasonable.
FINRA stated that quantitatively unsuitable transactions were effected by Clint H. Keener in the accounts of five Capital City customers at a time when Clint H. Keener was permitted by the securities broker dealer to exercise discretion in those customers’ accounts. He decided which securities to buy and sell in the accounts of customers who provided him discretion. Clint H. Keener’s short-term trading strategy involved costly in-and-out trading of options and equities. It was next to impossible for customers to generate a profit given the costs associated with his trading strategy and the frequency in which transactions were effected.
CK’s trading caused customers’ accounts to suffer from annual turnover rates that ranged from 8.2 and 12.7 and cost-to-equity ratios that ranged from 19.7 percent to 31.7 percent. For example, between September of 2015 and May of 2016, a total of 522 transactions were effected by Clint H. Keener in an account held by a retiree. The stockbroker caused that account to contain a cost-to-equity ratio of 19.96 percent and an annual turnover rate of 11.9. He caused the customer to pay $25,654.15 in trading costs. Capital City’s failure to supervise Clint H. Keener’s excessive trading in this regard was violative of FINRA Rules 2010 and 3110.
The AWC also stated that from July 30, 2015 to August 10, 2015, no reasonable due diligence had been undertaken by Capital City to assess suitability of private placement transactions initialed by stockbroker JM. FINRA indicated that JM sold $10,000,000.00 in preferred stock shares through a private placement offering. The securities broker dealer did not make any reasonable attempt to investigate the issuer of those preferred stock shares. Capital City also neglected to document sufficient due diligence on this Regulation D offering which amounted to its failure to supervise in violation of FINRA Rules 2010 and 3110.