McNally Financial Services Corporation, a securities broker dealer headquartered in San Antonio, Texas, has been censured and fined $35,000.00 by Financial Industry Regulatory Authority (FINRA) based upon accusations that it failed to supervise stockbrokers’ sales of nontraditional exchange traded funds. Letter of Acceptance, Waiver, and Consent No. 2018058820103 (November 23, 2021).
According to the AWC, between March of 2014 and March of 2019, McNally Financially Services Corporation did not create or implement an adequate supervision system or written supervisory procedures relating to nontraditional exchange traded funds. The AWC states that the supervision system and procedures failed to consider the risks and features of those funds, including risks of holding them for extended periods.
McNally Financial Services Corporation’s supervisory procedures called for special due diligence and supervision of nontraditional exchange traded funds, but those procedures did not identify how supervisors should assess the suitability of the products for customer accounts given the risks and features. The AWC states that the supervisor who was supposed to review stockbrokers’ trades had not been provided with any tools for detecting nontraditional exchange traded fund transactions.
McNally Financial Services Corporation did not use exception reports, alerts, restrictions, or any process for identifying when a nontraditional exchange traded fund purchase was made. The securities broker dealer had no mechanism for monitoring holding periods.
According to the AWC, McNally Financial Services Corporation’s failure to supervise resulted in a stockbroker selling a nontraditional exchange traded product to two customers. One customer held the investment for 33 months, and the other held the investment for four years. The securities broker dealer did not identify these transactions or that investors held them for these periods. This precluded the firm from identifying whether the stockbroker effected unsuitable sales.
There was no point in which McNally Financial Services Corporation checked whether the stockbroker comprehended the risks and features of the products or whether the stockbroker had an adequate reason to believe that his recommendations were suitable.
The AWC also states that between March of 2014 and March of 2019, a stockbroker was not adequately supervised by McNally Financial Services Corporation, resulting in unsuitable options trading. FINRA states that options spread strategies were recommended to customers by this stockbroker. Each strategy entailed buying option contracts with the same expiration dates but with different strike prices.
McNally Financial Services Corporation failed to identify whether the stockbroker’s trades were consistent with customers’ investment objectives. The securities broker dealer knew of concerns relating to the stockbroker’s trading, as he used the same strategy for investors regardless of their investment experience, net worth, and age.
In one case, the stockbroker had a customer make 108 sets of options spread trades from August of 2014 to March of 2019. That customer had a long-term growth objective, moderate risk exposure, and no experience with options trading. The stockbroker made the same options spread trading recommendations for investors who had substantial experience. FINRA states that the trades were also unusually risky because the maximum loss was nine times greater than the maximum gain.
FINRA states that the securities broker dealer did not identify the frequency of the stockbroker’s recommended options trades to identify whether the transactions were appropriate, violating FINRA Rules 2010, 3110, and 2360(b)(20).
