Lincoln Financial Advisors, located in Fort Wayne, Indiana, was censured and fined $90,000 by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm failed to adequately supervise the activities of a registered representative who engaged in unsuitable penny stock trading. Letter of Acceptance, Waiver and Consent, No. 2011029739902 (Dec. 8, 2015).
According to the AWC, Lincoln Financial Advisors had written supervisory procedures which prohibited solicited penny stock transactions by firm representatives. Despite this, from January 2010 through September 2011, a firm’s registered representative, PT, placed over one thousand and seven hundred penny stock orders in connection with at least fifteen customers, where PT had reportedly marked such orders as unsolicited when many of the orders appeared to have been solicited.
The AWC indicated that PT had recommended penny stock transactions that were unsuitable because they had led to overconcentration of penny stocks in the customers’ accounts, and were also contrary to the customers’ stated investment objectives. FINRA found that the firm had failed to enforce its supervisory procedures concerning penny stock transactions, while also failing to establish a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations. Specifically, FINRA found that the firm’s existing systems were deficient because it failed to detect the scope of PT’s activities and provide preventative measures.
The AWC further indicated that PT’s low-priced securities during the relevant period prompted one hundred and fifty alerts on the firm’s exception reporting systems. Notwithstanding the alerts, LFA had reportedly failed to detect the scope, or unsuitability, of PT’s low-priced securities transactions because the firm analyzed each particular transaction in insolation to determine exceptions.
The AWC further noted that on three separate occasions, the firm’s analysts had raised questions concerning the nature of PT’s low-priced securities transactions, yet the firm did not sufficiently investigate further or accepted PT’s explanations. PT’s conduct prompted a customer complaint in September 2011, resulting in the firm suspending PT’s trading authority. In October 2011, the firm had terminated PT for violating the firm’s policy concerning penny stock transactions. However, this did not prevent the firm from receiving fifteen complaints relating to PT – resulting in $616,109 in settlements to be paid out to customers alleging unsuitable recommendations, and guaranteeing against loss concerning the low-priced securities. FINRA ultimately found that the firm had violated NASD Rule 3010(b) and 2010 as a result of failing to enforce its procedures concerning low-priced securities.
Securities brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of suitability, unauthorized trading, or excessive activity. FINRA Conduct Rule 3010 specifically provides that each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association. Final responsibility for proper supervision shall rest with the member.
FINRA Rule 2111 requires that associated persons have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer. FINRA will generally find this rule to be violated when the registered representative does not have a basis to believe that the recommendation is suitable for at least some investors, that the recommendation is suitable for a particular customer considering the customer’s investment objectives and financial profile, and (for the accounts where the individual is exercising discretion) that a series of recommended transactions are not excessive and unsuitable even if each transaction alone would be deemed suitable.
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