Capitol Securities Management Inc. is a brokerage firm headquartered in Glen Allen Virginia has been censured and fined $100,000.00 by Financial Industry Regulatory Authority (FINRA) based in part on the firm’s consent to findings that it failed to reasonably supervise its business practices to prevent trading of unit investment trusts on an unsuitable basis. Letter of Acceptance Waiver and Consent No. 2017052215401 (May 25, 2018).
According to the AWC, between March 15, 2011 and March 15, 2017, the firm neglected to create and implement adequate written supervisory procedures and supervision systems for purposes of identifying and preventing unsuitable trading of unit investment trusts in customer accounts. Specifically, the firm neglected to set forth any processes for addressing concerns about suitability when unit investment trusts were traded on a frequent, short-term basis. FINRA noted that unit investment trust trading on a short-term basis may be inappropriate because of the upfront charges, structure and long-term nature of the investment.
The AWC revealed that Capitol Securities Management implemented a supervisory policy in April of 2013 which required unit investment trust switch forms to be submitted so that the firm could identify instances of premature unit investment trust sales; however, the firm never enforced that policy. Moreover, the firm reportedly failed to utilize any exception or surveillance reports to identify when trading of unit investment trusts had been effected on a short-term basis.
The AWC revealed that between March 15, 2011 and March 15, 2017, three stockbrokers registered with Capitol Securities Management advised and executed short-term trades of unit investment trusts. Most of those unit investment trusts that stockbrokers recommended contained sales charges that ranged between 1.95 percent and 3.95 percent. Apparently, the stockbrokers routinely recommended that unit investment trusts be sold within twelve months of the purchase date; those customers held the unit investment trusts for three hundred twenty-five days on average.
The AWC further detailed that the stockbrokers made recommendations for customers to take proceeds from a premature unit investment trust sale and apply them towards other unit investment trusts that contained the same objectives for investing. Consequently, customers incurred $44,740.33 in excess sales charges. FINRA found that Capitol Securities Management’s activities were violative of FINRA Rules 2010 and 3110 as well as National Association of Securities Dealers (NASD) Rule 3010.
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