Betsy Marcom of Georgetown, Texas, a Stockbroker with Next Financial Group, Inc. was fined $15,000 and suspended for four months from association with any Financial Industry Regulatory Authority (FINRA) member firm after consenting to findings that she made unsuitable investment recommendations to her client, HTCC, a non-profit parish church. Letter of Acceptance, Waiver and Consent, No. 2013037257201 (Dec. 30, 2015).
According to the AWC, HTCC had been a client of Marcom’s since approximately 2000. In 2009, at a time when Marco had moved to NEXT from another firm, the parish had transferred their account to NEXT, which held CDs and cash. The AWC reported that HTCC’s new account document at NEXT, dated February 12, 2009, stated that HTCC’s risk tolerance was conservative/growth, with investment objectives of income and capital preservation.
The AWC indicated that from June 2009 through June 2012, investment decisions made on behalf of HTCC were approved by a Finance Council that Marcom was a member of. Marcom was reportedly the parish’s business manager, and the only one with any financial industry background. In June 2009, Marcom reportedly proposed non-investment grade bonds to the Finance Committee at HTCC in order to generate higher returns, which resulted in the Finance Committee’s acceptance of the recommendation.
By April 2011, 99% of HTCC’s account was invested in non-investment grade bonds. By September 30, 2011, after additional deposits were made in the account, roughly 45% of the account’s $706,022 was invested in non-investment grade bonds. HTCC subsequently sustained approximately $135,000 in realized losses as a result of unsuitable holdings in the non-investment grade bonds. Further, on four occasions in 2011, Marcom had recommended that the firm sell bonds within three months of maturity, resulting in the firm receiving $3,661 less than it would have if the bonds were held to maturity.
FINRA found that Marcom engaged in the recommendation of non-investment grade bonds that were not suitable for HTCC’s risk tolerance, investment objectives, or financial situation; had unsuitability concentrated HTCC’s account in such bonds; and unsuitability sold the bonds within three months of maturity. FINRA found that Marcom’s conduct was therefore violative of NASD Rule 2310, FINRA Rule 2111 and Rule 2010.
FINRA Conduct Rule 2111 provides that a member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.
A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
Prior to the recommendation of any security, the broker must first understand the risk and characteristics of the securities being recommended, and whether that security is suitable for any customer. The second step, in connection with the recommendation of a particular investment or investment strategy, is to determine whether the transaction is suitable for that particular customer.
Public disclosure records reveal that on January 22, 2009, Marcom was discharged by Investment Professionals, Inc. amid allegations of a dispute pertaining to miscommunications to family members of a TOD account. On December 3, 2013, Marcom settled a customer dispute for $135,000 after a customer questioned the suitability of investments.
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