NYLife Securities LLC a securities broker dealer headquartered in New York New York has been censured and fined $250,000.00 by Financial Industry Regulatory Authority (FINRA) based upon the securities broker dealer’s consent to findings that it neglected to supervise mutual fund sales executed by its stockbrokers to ensure that those sales were suitable for customers. Letter of Acceptance Waiver and Consent No. 2016050685102 (Nov. 20, 2019).
According to the AWC, between September of 2014 and December of 2016, written procedures were maintained by NYLife governing the monitoring and supervising of the sales of speculative and risky mutual funds to its customers. Specifically, the procedures called for supervisory personnel to review sales to ensure that the transactions were consistent with the investment objectives and the risk tolerances communicated by its customers and consistent with other information forming the customers’ investor profiles. FINRA stated that the procedures were meant to safeguard customers against their accounts being over-concentrated in speculative investments.
The AWC stated that NYLife’s procedures were executed in part through the use of an automated surveillance system which took into account the customers’ objectives and risk tolerances. The system generated alerts in situations including where customers who had moderately conservative risk tolerances and who maintained objectives of income and moderate growth had portfolios with an excess of thirty percent in higher risk mutual fund positions. Also, NYLife’s policies called for reviewers to assess the red flags generated through the firm’s automated surveillance systems. In those situations, the customers were supposed to be either instructed to modify their risk tolerances to allow for concentrations of higher risk investments or instructed to reduce the risk in their portfolios through reallocations.
The AWC stated that the supervisory procedures were ineffective because NYLife Securities did not enforce them. Alerts failed to be adequately examined by reviewers. Insufficient resources were provided to reviewers precluding them from properly handling their duties. In fact, customers’ investor profiles had been modified by the reviewers to clear the way for the more speculative investment allocations. In those cases, customers were not contacted by the securities broker dealer beforehand to assess whether a more conservative allocation was warranted. FINRA revealed that in some cases, customers’ investor profiles had been modified without NYLife bothering to assess the true extent of risk that the customers were willing to take, and without the customers having provided consent.
NYLife’s supervisory failures spawned a stockbroker’s solicitation of inappropriate investments for more than forty-eight customers. In fact, the customers were advised to place their assets in sector-specific energy funds which focused on, inter alia, the exploration, production and utilization of natural resources of energy. The AWC stated that six customers of the firm who were risk adverse and who contained conservative objectives for investing had concentrations of at least thirty-five percent of their portfolios in speculative funds. Two of those customers’ portfolios comprised eighty percent of their liquid net worth.
Also, the AWC stated that because of oil prices declining subsequent to customers’ purchases, the values of their speculative mutual fund holdings dropped by as much as seventy-five percent. This led the customers to sustain a total of $1,400,000.00 in losses. The AWC stated that complaints were received by at least twenty-one customers prior to FINRA intervening. FINRA found that NYLife’s failure to supervise caused customers’ losses. The securities broker dealer’s conduct was found by FINRA to be violative of FINRA Rules 2010 and 3110(b) as well as National Association of Securities Dealers (NASD) Rule 3010(b).
