Hilltop Securities Independent Network, a broker-dealer located in Dallas, Texas, was censured and fined $40,000.00 by Financial Industry Regulatory Authority (FINRA) based upon the firm’s consent to findings that it failed to supervise the activities of a registered representative who made investment recommendations that were not suitable for customers, and failed to create and implement supervision systems to identify and avert improper trading and switching of investments in customer accounts. Letter of Acceptance, Waiver and Consent, No. 2013034954002 (June 28, 2017).
According to the AWC, between May of 2012 and March of 2014, switches and trades were effected by the firm’s registered representative in the accounts of customers, despite the transactions having been inappropriate for them. Particularly, the AWC revealed that the registered representative effected closed end fund trades on an unsuitable basis in two of the customers’ accounts, and effected faulty switches and trades of unit investment trusts and open-end mutual funds in four customer accounts on a short-term basis. FINRA indicated that customers sustained investment losses totaling $5,329.75 by way of person’s unsuitable trading.
The AWC stated that the firm and its office of supervisory jurisdiction manager, Douglas Hodges, did not retrieve switch letters from the registered representative in reference to unit investment trust and open-end mutual fund transactions effected by the representative in seven occasions in customer accounts, even though these letters were required to be furnished when customers moved from one security or variable product to a comparable investment. When prompted by the firm’s supervision programs, Hodges reportedly indicated that the matters were resolved when they had not been. Moreover, the AWC stated that Hodges and the firm had no procedures in place to ensure the accuracy of the letters submitted; no investigation was conducted to follow up on missing information or explanations for switches of investments that seemed illogical. FINRA found that these supervisory failures caused the customers to sustain investment losses.
Moreover, the firm’s existing written supervisory procedures mandated that supervisors monitor customers’ actively traded investment accounts; however, in twelve occasions between July of 2012 and January of 2014, the firm failed to document reviews of alerts that the supervision system generated in reference to irregular customer account activity. Particularly, the AWC revealed that no review had been documented that demonstrated that these alerts were investigated or otherwise responded to, nor was an account review form completed by Hodges.
The AWC further detailed that the firm’s supervision processes were not adequately designed to identify instances when there was inappropriate trading or switches of unit investment trusts and open-end mutual funds in customer accounts, or when closed end fund trades were not suitable. Specifically, FINRA found that the firm’s systems were overly restricted in terms of discovering trends of inappropriate transactions, and it was not possible for supervisors to manually identify unsuitable transactions based on the vast amount of transactions effected by the firms’ staff. As a result, FINRA found that the firm’s and Hodges’ supervisory failures constituted violations of FINRA Rule 2010 and NASD Rule 3010.
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