ProEquities, Inc., headquartered in Birmingham, Alabama, was censured and fined $200,000.00 by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm failed to supervise non-traditional exchange-traded funds and variable annuities. Letter of Acceptance, Waiver and Consent, No. 2014039418801 (Aug 8, 2016).
According to the AWC, from January of 2008 through April of 2012, the firm had allowed its stockbrokers to engage customers in the solicitation of transactions for non-traditional exchange-traded funds. Throughout this time frame; however, ProEquities did not have any written procedures which pertained to the supervision and suitability of the recommendations of the firm’s staff to customers regarding these types of securities.
FINRA also noted in the AWC that it notified firms such as ProEquities that non-traditional exchange traded funds are geared towards accomplishing objectives over a single trading period, and that the performance of such funds can significantly deviate from the fund’s benchmark when held for prolonged holding periods. Apparently, ProEquities failed to have supervisory procedures which would be designed to detect circumstances in which customers held non-traditional exchange traded funds for extended periods.
FINRA additionally claimed in the AWC that the firm failed to reasonably train and provide guidance to its staff concerning non-traditional exchange traded fund characteristics and risk factors. Given the aforementioned conduct, FINRA found the firm to be in violation of FINRA Rule 2010 and NASD Conduct Rules 2110 and 3010(b).
ProEquities, according to the AWC, was also found to have fallen short of its supervisory obligations concerning variable annuities. The AWC stated that from June of 2013 through March of 2014, the firm did not properly enforce its written procedures concerning the supervision of variable annuities recommendations.
FINRA particularly noted that the firm’s procedures concerning variable annuities called for an enhanced review by supervising principals concerning purchases of variable annuities when customers used forty percent or more of their net worth in such purchases. Supervisory principals, according to the firm’s procedures, were required to document the results of the enhanced review. However, the firm failed to ensure that the reviews were actually performed by such supervisory principals and subsequently documented.
The AWC also noted the firm’s failure to abide by its own procedures which called for a timely and consistent report to be conducted concerning weekly 1035 exchanges (annuity switches). Finally, FINRA noted that the firm failed to address certain aspects of suitability associated with variable annuity transactions. Particularly, the firm did not factor in the share class of annuities when constituting suitability. FINRA found that the firm’s aforementioned supervisory failures constituted violations of FINRA Rules 2010, as well as 2330(d) and NASD Conduct Rule 3010(b).
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