Key Investment Services LLC a securities broker dealer headquartered in Brooklyn Ohio has been censured and fined $425,000.00 by Financial Industry Regulatory Authority (FINRA) based upon findings that the securities broker dealer: (1) failed to supervise unit investment trust transactions executed in customer accounts by its stockbrokers (2) neglected to enforce procedures relating to the supervision of securities transactions and (3) provided wrong information to customers in regards to unit investment trust switches. Letter of Acceptance Waiver and Consent No. 2013039634703 (Dec. 5, 2019).
According to the AWC, customers were advised by Key Investment Services to invest in unit investment trusts comprised of leveraged closed end funds and which either contained significant high yield bond exposure or a single class of fixed income products. Risks of unit investment trusts were elevated because of the leverage, non-investment grade credit quality and lack of diversification. Unit investment trust transactions were therefore supposed to be manually reviewed for suitability by Key Investment Services’ central principal review desk. However, FINRA indicated that there was no guidance contained in Key Investment Services’ written procedures to help supervisors with assessing and documenting transactions involving the riskier unit investment trust products. The AWC stated that electronic alerts were used by the central principal review desk for transactions, but those alerts were ineffective because they failed to take into account the suitability issues which pertained to the riskier investments in relation to investor profiles.
There were suitability concerns pertaining to the unit investment trust transactions given customers’ liquidity needs, investment time horizons, incomes, investment experiences, ages, risk tolerances, and other aspects of the customers’ investment profiles, but these red flags were neither identified nor adequately addressed in regard to one hundred unit investment trust purchases recommended by Key Investment Services’ stockbrokers. There were no cancellations of these transactions, and the securities broker dealer did not adequately document the rationale of these investment recommendations given the suitability concerns and elevated risks of the investments. FINRA found that Key Investment Services’ conduct was violative of FINRA Rule 2010 and NASD Rule 3010.
The AWC also stated that Key Investment Services neglected to enforce supervisory procedures pertaining to suitability. In order to conform to FINRA requirements on suitability, Key Investment Services’ new customer account forms had been revised to include information about the customers’ investment time horizons, liquidity needs and other investments, but the securities broker dealer failed to procure this information or otherwise comply with FINRA suitability requirements. FINRA found Key Investment Services’ conduct violative of FINRA Rules 2010 and NASD Rule 3010.
In addition, the AWC stated that certain switches of certificates of deposit, unit investment trusts, mutual funds and annuities necessitated the completion of a switch disclosure letter. FINRA stated that annual asset based charges and sales charges were disclosed in this letter, but the estimated expenses, sales charges and fees of recommended unit investment trusts had been understated for one hundred eighty-nine switches. Customers were presented with inaccurate information which made it appear more advantageous than it really was to go along with unit investment trust switches. FINRA found that the securities broker dealer’s conduct constituted a violation of FINRA Rule 2010.
