Jeffrey L. Rittberger of New Concord, Ohio, a stockbroker associated with Huntington Investment Company, was fined $10,000 and suspended for forty-five days from association with any Financial Industry Regulatory Authority (FINRA) member in all capacities after consenting to findings that he made unsuitable recommendations to firm customers. Letter of Acceptance, Waiver and Consent, No. 2013036874902 (Nov. 20, 2015).
According to the AWC, between December 2012 and February 2013, Rittberger had participated in the recommendation of purchases of municipal unit investment trusts (UITs) which totaled $198,000 to five of the firm’s customers. Rittberger reportedly failed to conduct reasonable diligence regarding the UITs prior to participating in the recommendations and lacked an understanding of the product’s potential risks and rewards.
FINRA defines a unit investment trust is a type of investment company that issues securities (referred to as units) representing undivided interests in a relatively fixed portfolio of securities. The securities are generally issued by a sponsor that assembles the UIT’s portfolio of securities, deposits the securities into a trust, and then sells units of the UIT in a public offering. The units are redeemable securities that are issued for a specific term, where each investor is entitled to receive a proportionate share of the UIT’s net assets upon redemption or termination.
The AWC indicated that Rittberger used a consistent pitch to ascertain customers’ interest in the Municipal UITs, telling the customers that the UITs had historically earned five percent annual returns and were expected to continue to perform well, despite there being no guarantees. The AWC stated that after Rittberger had determined the customers’ interest and completed paperwork for the customers, he passed the relevant information to his colleagues, Series 7 registered representatives, for completion of the sale. The AWC indicated that colleagues did not follow up with customers to discuss their investment goals and the UITs in greater detail prior to completing and submitting paperwork.
The AWC further stated that Rittberger, who learned about the UITs solely through brief conversations with his registered representative colleagues, did not perform any other reasonable due diligence on the UITs prior to recommending them to customers. Specifically, FINRA claimed that Rittberger failed to read the prospectuses or literature for the UITS and failed to learn about UITs from wholesalers or other employees of the issuing product sponsor. FINRA found that Rittberger therefore failed to know about how the closed end funds in the UIT’s portfolios were leveraged or understood the associated effect of the leverage; failed to know that that the closed end funds could invest in junk bonds or understand the risk associated with such; failed to understand the volatility that the closed end funds and UITs were subject to; failed to know that the closed end funds invested in bonds whose maturities did not match the trusts’ termination dates; failed to understand the liquidity and secondary market for the UITs; and failed to understand how the UIT investments would be valued at the trust termination.
FINRA Conduct Rule 2111 provides that a member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.
A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
Public disclosure records reveal that Rittberger was subject to a customer dispute on June 13, 2013, where he settled with the customer for $17,670.13 amid allegations of misrepresentation in the sale of the unit investment trust that the customer purchased.
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