Kovack Securities, Inc., headquartered in Fort Lauderdale, Florida, was censured and fined $125,000.00 by the Financial Industry Regulatory Authority (FINRA) for failing to apply sales charge discounts to eligible customers’ purchases of unit investment trusts, in addition to failing to develop and manage the requisite supervisory practices to ensure that eligible customers received sales charge discounts on UIT purchases. Letter of Acceptance, Waiver and Consent, No. 2014041840501 (May 11, 2016).
The AWC stated that from May 1, 2009 through April 30, 2014, Kovack did not detect and apply UIT discounts when customers were eligible to receive them. Consequently, Kovack’s customers were excessively charged an estimated $119,319.27. FINRA found that Kovack’s conduct in this regard was violative of FINRA Rule 2010.
According to the AWC, sponsors of unit investment trusts (UITs) provide investors several methods to receive a sales charge discount pertaining to eligible UIT purchases. The AWC stated that breakpoints are common practice, and applied when investors increase the size of UIT investments. Another common method indicated in the AWC includes discounts that are applied when customers’ rollover or exchange funds into UIT investments.
The AWC further stated that Kovack lacked the appropriate supervisory procedures and systems to detect when UIT discounts would be applicable. Apparently, Kovack relied upon its own personnel to ensure sales were provided, but failed to trained their staff (and their supervisors) on how to identify when the discounts would be applicable.
FINRA found Kovack’s conduct in this regard to be violative of FINRA Rules 2010 and NASD Conduct Rules 3010(a) and (b). FINRA imposed a censure and $125,000.00 fine, while additionally ordering Kovack to provide the affected customers with restitution of $119,319.27 to address the discounts that Kovack failed to apply.
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