Independent Financial Group LLC a securities broker dealer headquartered in San Diego California has been censured and fined $200,000.00 by Financial Industry Regulatory Authority (FINRA) supported by findings that it failed to supervise a stockbroker who made unsuitable recommendations to customers. Letter of Acceptance Waiver and Consent No. 2018059223401 (Apr. 8, 2021).
According to the AWC, between January of 2008 and March of 2016, one of the stockbrokers under Independent Financial Group’s watch made unsuitable recommendations of alternative investments. The securities broker dealer failed to supervise him or investigate red flags relating to his activities.
FINRA indicated that several dozen customers who were nearing retirement or were in retirement had been solicited by the stockbroker to invest through him at Independent Financial Group. Those investors were told to liquidate their 401(k) accounts and their pensions so that they could invest in non-traded real estate investment trusts and structured notes. The regulator pointed out that those investors knew little about investing. They never invested in alternative investments before.
As an example, a 71-year-old customer who was retired and who had a conservative risk tolerance was told by the stockbroker to invest in alternative investments. The new account documents for the customer did not allow for any speculation but half of the customer’s liquid net worth had been placed into structured notes and non-traded real estate investment trusts. The customer initially invested $141,000.00 in one non-traded real estate investment trust. A suitability questionnaire that was completed in reference to that purchase revealed that the customer did not want speculation. That questionnaire was modified by the stockbroker to make it seem that the customer was comfortable with taking the risks.
In another example, a 72-year-old customer who had a moderate risk tolerance was positioned alternative investments by the stockbroker. The customer’s account documents reflected that they did not want to speculate. The stockbroker still recommended for three-fourths of the customer’s liquid net worth to be invested in structured notes and non-traded real estate investment trusts. The stockbroker also mismarked the customer’s order ticket to make it seem as though the transaction was not solicited. The AWC additionally indicated that the stockbroker was placed on heightened supervision at the time and this called for his transactions with this customer to be pre-authorized by his supervisor. But no Independent Financial Group supervisor pre-approved the purchases. The suitability questionnaires pertaining to the non-traded REIT also initially reflected that the customer did not seek speculation. The stockbroker decided to change that document without agreement by the customer.
The AWC stated that at one point, supervisors reported concerns relating to the recommendations made by the stockbroker. They pointed out that there were discrepancies with the suitability questionnaires and new account documents. The stockbroker was even twice placed on heightened supervision following customer arbitrations and complaints that had been filed against them. But none of those heightened supervision arrangements had been implemented by the securities broker dealer.
The AWC stated that there was no adequate response to red flags relating to customers’ forms being potentially altered. There was no response to concerns about customers’ signatures not matching up. There was no response concerning alternative investments being purchased in accounts that were ineligible.
FINRA also relayed that a supervisor reported to the compliance department that the stockbroker might have altered documents, mismarked trades and suspiciously changed customers’ risk tolerances. This did nothing to stop the stockbroker from continuing to sell the structured notes and non-traded REITs to customers.
A second supervisor of the stockbroker approved their sales of non-traded REITs when those transactions ran contrary to the firm’s guidelines. The stockbroker was questioned by that supervisor with respect to certain transactions, but this did not result in the supervisor taking the right steps to address the seemingly unsuitable sales.
FINRA found that the securities broker dealer violated FINRA Rules 2010 and 3110.