Quest Capital Strategies, Inc. of Miami, Florida, was censured and fined $25,000 from the Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm had failed to establish adequate supervisory systems and written supervisory procedures pertaining to supervision of mutual funds sales, supervision of accounts to prevent overcharging of customers, and other compliance failures. Letter of Acceptance, Waiver and Consent, No. 2014038995701 (Dec. 16, 2015).
According to the AWC, from April 12, 2012 through March 20, 2014, the firm had failed to establish adequate supervisory systems and written supervisory procedures to supervise certain mutual fund practices. The firm reportedly failed to have any written supervisory procedures specifically setting forth who would conduct mutual fund share class comparisons and breakpoint, rights of accumulation, and letter of intent analyses; how the mutual fund share class comparison and breakpoint, rights of accumulation and letter of intent analyses would be conducted, documented, and shared with customers; how the firm would supervise, and retain documentation evidencing supervision of, the mutual fund share class comparison and breakpoint, rights of accumulation and letter of intent analysis process; who would conduct a review of certain retirement accounts that may be eligible to purchase Class A shares at NAV through a sales charge waiver, and how the review would be conducted, supervised, and documented; and a timeframe for which a mutual fund switch would be reviewed by a designated principal.
The AWC indicated that during this period, the firm had failed to establish adequate supervisory systems concerning mutual fund transactions. The firm apparently failed to provide documentation that any such suitability by the firm’s compliance officers occurred. The AWC pointed out that with certain mutual fund transactions, the firm could not perform an adequate suitability review.
The firm’s Stockbrokers, according to FINRA, failed to complete an internal form, Mutual Fund Prospectus Risk and Benefit Disclosure, and Acknowledgement form for the new customers who held mutual funds as investments. The AWC stated that the firm failed to document any review concerning suitability of mutual fund transactions concerning the customers. Further, the firm was found to be using outdated forms that did not request the customer’s investment time horizon. FINRA found that during the relevant period, the firm failed to have written supervisory procedures in place to prevent charging a customer both an investment advisory management fee and broker-dealer transaction-based commission, and how the firm would ensure that customer information is kept confidential, safeguarded, and encrypted prior to sending electronically.
As a result of Quest’s aforementioned conduct, FINRA found that the firm to have violated NASD Conduct Rules 3010(a) and (b) and 3012, and FINRA Rule 2010.
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 stockbroker 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.
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