H. Beck, Inc., a brokerage firm headquartered in Bethesda, Maryland, has been censured and fined $50,000.00 by Financial Industry Regulatory Authority (FINRA) based on accusations that it failed to supervise non-traditional exchange traded fund recommendations made by stockbroker James Dresselaers, wherein Dresselaer’s recommendations were not suitable for a customer and caused the customer to incur investment losses as a result. Letter of Acceptance, Waiver and Consent, No. 2016048675901 (Sept. 27, 2017).
According to the AWC, non-traditional exchange traded funds were recommended by Dresselaers to customer EB, a professional athlete that had a long-term growth investment objective and a moderate tolerance for risk. Apparently, $2,300,000.00 in inverse and leveraged exchange traded funds had been recommended for EB by Dresselaers from July of 2008 to August of 2011.
The AWC reported that Dresselaers made recommendations for Dresselaers to maintain the non-traditional exchange traded fund holdings for periods that extended beyond the investments’ intended guidelines. Apparently, these funds were meant to be held for no later than one trading period, but EB was persuaded by Dresselaers to hold exchange traded funds for five years or longer in certain instances. FINRA found that Dresselaers’ recommendations in that regard were not suitable, and caused the customer to sustain $851,175.00 in losses.
The AWC further stated that Dresselaers made recommendations in 2011 for customer EB to invest an estimated $500,000.00 in equities, with $375,000.00 having been invested in mining sector and energy sector stock positions. EB apparently held a sixty-five percent concentration in those sectors by August of 2011, causing him to incur investment losses upon the decline in the markets for mining and metals. EB lost $248,618.00 based on Dresselaers’ unsuitable investment recommendations according to the AWC. FINRA found that Dresselaers’ conduct was violative of FINRA Rules 2010 and 2111, as well as NASD Rules 2110 and 2310.
The AWC revealed that Dresselaers’ activities were a result of the firm’s supervisory failures. Specifically, from July of 2008 to June of 2013, the firm’s registered representatives were permitted to make investment recommendations of non-traditional exchange traded funds without supervisory review for suitability. Apparently, stockbrokers were not provided the training on the suitability of non-traditional exchange traded funds.
The firm’s procedures reportedly neglected to consider that non-traditional exchange traded funds posed risks for extended holding periods. Evidently, the firm failed to distinguish between trading monitoring of the non-traditional exchange traded funds from monitoring of traditional products, causing it not to discover alerts of unsuitable transactions.
FINRA found that the firm’s supervision was deficient for failing to address red flags with inverse and leveraged exchange traded funds, and concluded that H. Beck, Inc. was liable for the unsuitable investment recommendations that Dresselaers made to the customer. Consequently, FINRA found that the firm’s conduct was violative of FINRA Rules 2010, 3110(a), 3110(b) as well as NASD Rules 2110, 3010(a), and 3010(b).
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