First Allied Securities, Inc., a broker-dealer headquartered in San Diego, California, was censured and fined $950,000.00 by Financial Industry Regulatory Authority (FINRA) after the firm consented to findings of misconduct that included, inter alia, the firm’s failure to appropriately supervise the sales of structured products. Letter of Acceptance, Waiver and Consent, No. 2015045234401 (Nov. 2, 2016).
According to the AWC, from October of 2006 to January of 2012, structured products were sold by First Allied Securities, Inc. to the firm’s retail customer base. These products were sold despite the firm’s lack of written supervisory procedures and supervision systems geared towards identifying and preventing structured products sales that were unsuitable.
Apparently, written supervisory procedures established by First Allied Securities, Inc. failed to guide staff with assessing suitability, and other procedures for supervising trades were disregarded. First Allied Securities, Inc. reportedly failed to ensure that registered representatives had completed proper training before making investment recommendations to the firm’s customers regarding structured products. As such, FINRA found that First Allied Securities Inc. committed violations of FINRA Rule 2010, and NASD Rules 2110 and 3010.
First Allied Securities, Inc. was also cited by FINRA for failing to supervise non-traditional exchange traded funds. Particularly, from October of 2011 to August of 2013, the firm sold exchange traded funds which were leveraged, inverse, and inverse-leveraged. Apparently, the firm’s supervisory procedures in this regard only accounted for the investor’s objectives and risk tolerance; holding periods were not monitored in a reasonably fashion. The AWC stated that non-traditional exchange traded funds were subject to increased risks based upon longer holding periods, and the products are normally intended to be held for no longer than one trading day.
The AWC revealed that customers often held non-traditional exchanged traded funds for longer than one day. Particularly, in mid-year 2013, exchange traded funds were held in 452 of the firm’s customer accounts for a minimum of thirty days. The AWC stated that First Allied Securities, Inc. eventually prohibited registered representatives from making non-traditional exchange traded fund recommendations. FINRA found that the supervisory failures of First Allied Securities, Inc. in this regard was violative of FINRA Rule 2010 and 3010.
Additionally, First Allied Securities, Inc. was cited by FINRA for failing to supervise consolidated reports. The reports, which contained assets held by customers within First Allied Securities, Inc. along with other outside firms, could be manually completed by registered representatives, per the firm’s supervisory procedures. However, the firm’s supervisory procedures, which called for verification of asset valuations, were not implemented after assets were initially entered into the reports, causing the entries of asset valuations in consolidated reports to go without verification and monitoring.
The AWC stated that in August of 2013, asset valuations were modified manually by registered representatives in 190 of the firm’s customer accounts, all without supervisory review. FINRA found that First Allied Securities, Inc. had violated FINRA Rule 2010 and Rule 3010.
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