Richard Michael Gholson, of Pahoa, Hawaii, a principal formerly registered with Cuso Financial Services, L.P., has been fined $5,000.00 and suspended from associating with any Financial Industry Regulatory Authority (FINRA) member in any capacity based upon consenting to findings that he failed to supervise the suitability of unit investment trust recommendations made by the firm’s brokers. Letter of Acceptance, Waiver and Consent, No. 2013039239101 (Jan. 19, 2017).
According to the AWC, from January of 2012 to August of 2013, Gholson was tasked with suitability reviews and had authority to approve of securities transactions which the firm’s registered representatives sought to effect. Apparently, a firm registered representative under Gholson’s authority, MH, made investment recommendations pertaining to seventy unit investment trust transactions which were reviewed and authorized by Gholson. The unit investment trusts were reportedly invested in closed end bond funds, and were recommended to forty-five customers of CUSO.
The AWC stated that MH’s unit investment trust recommendations were not adequately reviewed by Gholson. Apparently, Gholson was not cognizant of the risks associated with the unit investment trusts; he did not grasp the risk factors pertaining to the leverage potentially utilized them. Further, no reasonable due diligence had been conducted by Gholson regarding the unit investment trust recommendations made to customers by MH. Prior to approving MH’s sales, Gholson purportedly failed to review the unit investment trusts’ prospectuses which contained risks concerning leverage. FINRA found that Gholson’s failure to supervise MH’s unit investment trust sales was conduct violative of FINRA Rule 2010 and NASD Rule 3010.
CUSO Financial Services Censured And Fined For Unsuitable Unit Investment Trust Sales
CUSO Financial Services, L.P., headquartered in San Diego, California, was censured and fined $125,000.00 by FINRA for making investment recommendations in unit investment trusts which were not suitable, and for failing to implement sufficient supervisory protocols and procedures pertaining to unit investment trust sales. Letter of Acceptance, Waiver and Consent, No. 2013039239102 (Jan. 13, 2017).
The AWC stated that customers of CUSO registered representative, MH, collectively invested $4,636,146.00 in unit investment trust investments pursuant to MH’s unsuitable investment recommendations. The customers, several of whom were seniors, apparently sustained losses estimated at $443,000.00. The AWC revealed that several of the firm’s customers who sustained losses communicated low risk tolerances to MH, which FINRA stated should have caused red flags to be raised by CUSO’s principals pertaining to suitability of the transactions.
The AWC stated that CUSO, via principals MG and CD, failed to have any reasonable basis for recommendations made to fifty of the firm’s customers who purchased the products. Consequently, FINA found that CUSO’s conduct was violative of FINRA Rules 2010 and 2111, as well as NASD Rule 2310.
The AWC further detailed that the firm’s failure to reasonably supervise unit investment trust sales caused the unsuitable transactions to be effected by MH. Particularly, the AWC stated that the firm’s supervisory protocols and procedures were inadequately geared to assess unit investment trust suitability for customers. Evidently, the firm’s written procedures called upon the firm’s principals to conduct reviews of the transactions and to ultimately make determinations as to whether the transactions recommended by registered representatives were suitable.
The firm’s written procedures reportedly failed to provide adequate guidance to principals and brokers regarding suitability assessments pertaining to unit investment trusts that invest in close end funds which may utilize leverage. In particular, the firm’s written supervisory procedures did not provide specific guidance regarding how customers’ asset concentrations, net worth, and ages may affect the suitability determinations pertaining to speculative unit investment trust transactions.
Further, the firm evidently did not enforce existing procedures regarding suitability review and unit investment trust trading approval. Specifically, FINRA found that the prospectuses associated with unit investment trusts, which discussed risk factors pertaining to the investments, were not reviewed by the firm’s principal, MG. Rather, MG purportedly approved of MH’s unsuitable investment recommendations and sales of the unit investment trusts to forty-five of the firm’s customers. Consequently, the firm’s conduct was found by FINRA to be violative of FINRA Rule 2010 as well as NASD Rule 3010.
Guiliano Law Group
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