Ace Diversified Capital Inc. a securities broker dealer headquartered in San Gabriel California has been censured and fined $20,000.00 by Financial Industry Regulatory Authority (FINRA) founded on findings that (1) Ace failed to supervise exchange traded funds and exchange traded notes sold by its stockbroker (2) Ace failed to create and maintain a supervision system to identify and thwart excessive trading by its stockbrokers and (3) Ace failed to supervise options accounts. Letter of Acceptance Waiver and Consent No. 2016049183302 (Dec. 2, 2019).
According to the AWC, one of the firm’s stockbrokers serviced the accounts of customers EO, MS and OG. EO’s liquid net worth and annual income were between $50,000.00 and $100,00.00. MS had a liquid net worth of $20,000.00 and annual income of $50,000.00 to $100,000.00. OG had a $50,000.00 liquid net worth and annual income of $85,000.00. These customers had not previously traded complex securities; and their risk tolerances were moderate-to-aggressive.
The AWC stated that the customers’ risk tolerances, lack of experience, and financial statuses did not justify the stockbroker’s recommendations. Specifically, a total of sixty five non-traditional exchange traded notes and exchange traded funds purchases, which totaled $262,867 in value, had been recommended by the stockbroker. Customers’ accounts held the exchange traded note or exchange traded fund positions for more than a day despite the red flags which pertained to holding those investments for extended periods.
FINRA stated that there was no supervision system or set of supervisory procedures used by Ace to assess whether its stockbrokers’ exchange traded fund and exchange traded note recommendations were appropriate for customers. FINRA stated that the Ace’s supervisory failures were to blame for the extended holdings periods of exchange traded funds in the accounts of customers EO and OG, who both suffered losses. FINRA found that the securities broker dealer’s failure to supervise in this regard was violative of FINRA Rules 3110(a) and National Association of Securities Dealers (NASD) Rule 3010(a).
The AWC additionally stated that Ace failed to supervise quantitative suitability. Specifically, one of the stockbrokers effected trades at such high volume that it evidenced excessive trading. The customers’ accounts contained cost-to-equity ratios ranging from 25.32 percent to 30.53 percent; and turnover rates that ranged from eleven to twenty-three. FINRA stated that the turnover ratio and the profit and loss or change of equity should have been reviewed according to Ace’s supervisory procedures but there was no guidance provided on how those metrics could be reviewed or what signaled excessive trading.
Ace also failed to confirm within its procedures if the metrics it utilized were comparable to those outlined by FINRA. The securities broker dealer neglected to create and maintain an adequate supervision system and procedures to identify excessive trading and to ensure the suitability of stockbrokers’ recommendations. FINRA found Ace’s conduct violative of FINRA Rules 3110(a) and (b).
