Royal Alliance Associates, Inc. was censured and fined $225,000 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. 2012034450501 (Dec. 2, 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, Royal Alliance Associates 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. Royal Alliance Associates 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. Royal Alliance Associates was found to have violated NASD Conduct Rules 3010(a) and (b) and FINRA Rule 2010 in this regard.
FINRA found that from May 2009 to April 2014, Royal Alliance Associates failed to apply sales charge discounts to one thousand and fifty-five eligible UIT purchases, resulting in customers paying excessive sales charges of approximately $204,000. Royal Alliance Associates consented to a censure and a $225,000 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 $204,000 in restitution to affected customers.
Further, FINRA found that the firm had failed to reasonable supervise registered representative, GK, who from April 2009 – June 2011, effected UIT transactions in customer accounts that presented red flags to Royal Alliance. The red flags, according to the AWC, included a pattern of unsuitable short-term trading of UITs, sales of UITs prior to maturity dates resulting in high turnover rates and cost-to-equity ratios, switching UITs and other securities with similar investment objectives, and designating a disproportionate number of UIT transactions as unsolicited in the firm’s order entry system. FINRA found that the firm never prohibited GK from recommending the UIT purchases or rollovers, nor did the firm require GK to obtain pre-approval for the UIT transactions until just prior to GK’s termination. FINRA found that GK engaged in unsuitable UIT trades for nearly two years, in turn finding that Royal Alliance violated NASD Conduct Rule 3010 and 2010 for supervision failures.
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.
Additionally according to the AWC, from January 2009 through April 2013, the firm failed to establish, maintain and enforce a supervisory system and written supervisory procedures designed to ensure that customers who purchased a UIT received a prospectus. The firm was found to have violated NASD Conduct Rule 3010 and FINRA Rule 2010 in this regard.
This is not the first time that Royal Alliance has been subject to discipline for the supervisory failures. In November 2011, Royal Alliance had been censured and fined $175,000 after consenting to findings that the firm had failed to reasonably supervise two registered representatives to ensure that they made required disclosures concerning outside business activities and state regulatory actions. Letter of Acceptance, Waiver and Consent, No. 2009017644201 (Nov. 2011).
Additionally, in April 2009, the firm was subject to a $500,000 civil monetary penalty by the SEC after it settled an administrative proceeding containing findings that the firm failed to supervise a registered representative who engaged in a Ponzi scheme during a four-year period that defrauded twenty eight investors of at least $3,000,000.00. Exchange Act Rel. No. 59830, Admin. Proc. 3-13456 (Apr. 2009).
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