James S. Witter of Garden City, New York, a registered representative with Royal Alliance Associates, Inc., was fined $5,000 and suspended for two months from association with any Financial Industry Regulatory Authority (FINRA) member in any principal capacity after consenting to findings that Witter failed to reasonably supervise a registered representative who engaged in unsuitable transactions. Letter of Acceptance, Waiver and Consent, No. 2012034450502 (Dec. 8, 2015).
According to the AWC, from April 2009 through June 2011, Witter had failed to reasonably supervise registered representative GK, who worked in a Royal Alliance branch office in New Jersey and earned the majority of his commissions via the sale of unit investment trusts.
FINRA defines a unit investment trust as 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.
The AWC stated that in 2011, Royal Alliance had filed a Form U5 reporting GK’s voluntary termination from the firm and disclosed that the firm was conducting an internal review of GK exchanging unit investment trusts prior to maturity, making misrepresentations regarding unit investment trusts to customers, and failing to deliver unit investment trust prospectuses.
The AWC further stated that when GK was with Royal Alliance, Witter’s primary supervisory task was to conduct a daily review of all of GK’s securities transactions via the firm’s electronic trade review system. According to the AWC, from April 2009 – June 2011, GK had effected unit investment trust transactions in customer accounts that presented red flags, such as: a pattern of unsuitable short-term trading of UITs (including selling UITs prior to maturity which resulted in high cost/equity ratios and turnover rates in customer accounts); switching between UITs and other securities with similar investment objectives; and designating a disproportionate number of UIT transactions as unsolicited.
The AWC indicated that Witter was issued surveillance reports which identified the aforementioned activities. Yet, Witter reportedly failed to reasonably supervise GK regarding his conduct. According to the AWC, Witter continued to approve GK’s trades without further inquiring. The AWC even noted that Witter had failed to effectively implement trading parameters instituted by Royal Alliance to address GK’s activities. FINRA found that Witter’s conduct resulted in GK engaging in unsuitable UIT trades for nearly two years until his termination. FINRA therefore found that Witter’s conduct in this regard was violative of NASD Conduct Rule 3010 and FINRA Rule 2010.
FINRA Rule 2111 requires that associated persons have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer. FINRA will generally find this rule to be violated when the individual does not have a basis to believe that the recommendation is suitable for at least some investors, that the recommendation is suitable for a particular customer considering the customer’s investment objectives and financial profile, and (for the accounts where the individual is exercising discretion) that a series of recommended transactions are not excessive and unsuitable even if each transaction alone would be deemed suitable.
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.
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