ProEquities, Inc. was censured and fined $165,000 by Financial Industry Regulatory Authority (FINRA) for failing to apply sales charge discounts to certain customers’ eligible purchases of unit investment trusts (“UITs”) in violation of FINRA Rule 2010; as well as failing to establish, maintain and enforce a supervisory system and written supervisory procedures reasonably designed to ensure that customers received sales charge discounts on all eligible UIT purchases. Letter of Acceptance, Waiver and Consent, No. 2014041675701 (Oct. 17, 2015).
FINRA defines a unit investment trust is a type of investment company that issues securities (referred to as units) representing undivided interests in a relatively fixed portfolio of securities. The securities are generally issued by a sponsor that assembles the UIT’s portfolio of securities, deposits the securities into a trust, and then sells units of the UIT in a public offering. The units are redeemable securities that are issued for a specific term, where each investor is entitled to receive a proportionate share of the UIT’s net assets upon redemption or termination.
According to FINRA, UIT sponsors offer investors several ways to reduce sales charges on UIT purchases. The most common methods of reducing the fee are “breakpoints” which allow investors to reduce sales fees by increasing the size of their UIT investments, and/or discounts on rollovers and exchanges. FINRA refers to either method of reducing fees as “sales charge discounts.”
FINRA, via Notice to Members 04-26, reminded broker-dealers that they should be developing and implementing procedures which ensure customers receive the sales charge discounts when entitled. The Notice stated that UIT transactions have to take place on the most advantageous terms available to customers and that it is the firm’s responsibility to ensure employees understand, inform customers about, and correctly apply applicable price breaks available to customers purchasing the UITs.
According to the AWC, ProEquities failed to establish, maintain and enforce supervisory systems and written supervisory procedures reasonably designed to ensure customers received sales charge discounts on eligible UIT purchases. ProEquities reportedly relied on registered representatives to ensure customers received the appropriate UIT sales charge discounts, even though the firm did not effectively inform and train representatives and their supervisors to identify and apply the sales charge discounts. ProEquities was found to have violated NASD Conduct Rules 3010(a) and (b) and FINRA Rule 2010 in this regard.
FINRA found that ProEquities failed to apply sales charge discounts to seven hundred and thirteen eligible UIT purchases, resulting in customers paying excessive sales charges of approximately $109,709. ProEquities consented to a censure and a $165,000 fine in connection with violating FINRA Rule 2010, and NASD Rules 3010(a) and (b) in connection with the aforementioned conduct occurring from May 1, 2009 – April 30, 2014; and was ordered by FINRA to pay $109,709 in restitution to affected customers.
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.
Guiliano Law Group
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