Liberty Financial Partners, a brokerage firm headquartered in Mount Pleasant, South Carolina, has been censured and fined $100,000.00 by Financial Industry Regulatory Authority (FINRA) based upon allegations that the firm, inter alia, failed to supervise transactions effected in customer accounts to determine whether customers incurred excessive costs and had been exposed to excessive trading. Letter of Acceptance, Waiver and Consent, No. 2015043246402 (Dec. 11, 2017).
According to the AWC, from January of 2014 to September of 2015, the firm did not make sure that written supervisory procedures detailed the manner in which the firm would discover and rectify possible trading of investments on an excessive basis. The AWC stated that the firm failed to provide adequate supervision of its stockbrokers’ trading activities to determine whether trades had been excessively executed.
Evidently, the firm’s written supervisory procedures detailed that active trading documentation should be sent to customers upon the identification of customer accounts demonstrating possible excessive trading; however, they did not indicate how often or when a review of the customer’s investment account would be conducted by a principal or how excessive trading would be determined upon review. The AWC further revealed that the written supervisory procedures did not utilize specific parameters for determining when paperwork would be sent to customers, or what would be contained with that paperwork, or even how reviews of active trading paperwork would be evidenced by the firm’s principals.
Liberty Partner’s written supervisory procedures reportedly neglected to confirm how any possible restrictions could be placed on investment accounts to enable only closing transactions to be effected, or reference how long or under what basis the restrictions would be imposed. In situations where accounts exposed to possible excessive trading prompted restrictions on commissions, the firm’s written supervisory procedures apparently failed to determine how they would be imposed and for how long those restrictions would be in place.
The AWC also revealed that customer account activities had not been conducted regularly by the firm. Consequently, customers’ accounts that were possibly exposed to excessive trading had not become subject of a review by the firm for months in certain situation; some accounts were never reviewed at all. Evidently, the firm failed to take action regarding excessive trading when excessive trading was discovered.
Apparently, when the firm identified that a customer was supposed to receive active trading documentation to confirm whether activities in the customers’ accounts were approved by them, the firm failed to make sure that its staff sent customers those documents or that otherwise confirm that customers returned the documentation.
The AWC stated that the firm did not speak with customers after learning that their accounts had been subject of active trading. Certain customers reportedly had annual turnover ratios that ranged from 24 to 104, and cost-to-equity ratios that ranged from 56 percent to 232 percent. Ultimately, FINRA found that the firm’s supervisory failures were violative of FINRA Rules 2010, 3110(a), 3110(b), as well as NASD Rules 3010(a) and 3010(b).
The AWC further stated that from January of 2014 to September of 2015, the firm failed to create and implement adequate supervision systems and written supervisory procedures relating to excessive options costs assessed to customers. Apparently, options transactions effected by the firm’s stockbrokers had not been adequately supervised, which included the commissions assessed to customers on transactions.
The AWC stated that the written supervisory procedures that the firm utilized merely confirmed that a review of options transactions in customers statements would be conducted by a principal to determine the commissions as a percentage of the customer’s equity. Yet, the written supervisory procedures did not provide sufficient information about what costs or commissions were appropriate, nor did the procedures outline what the firm would need to do in order to effectively supervise those costs and commissions. Evidently, those procedures failed to outline how reviews of commissions as a percentage of the customer’s equity would be evidenced or what was required of the options principal in discovering possible excessive costs or commissions.
The AWC revealed that from January of 2014 to September of 2015, some of the options transactions contained costs that exceeded the ten percent limit informally imposed by the firm; twenty-three options transactions contained costs in excess of fifteen percent. The firm reportedly failed to take any action when excessive costs were apparent. Consequently, FINRA found that the firm’s conduct was violative of FINRA Rules 2010, 3110(a), 3110(b), as well as NASD Rules 3010(a) and 3010(b).
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