Sanctuary Securities (formerly known as David A. Noyes Company) has been censured and fined $160,000.00 by Financial Industry Regulatory Authority (FINRA) founded on findings that Sanctuary Securities failed to supervise its non-traditional exchange traded fund (NT-ETF) business to ensure that stockbrokers executed suitable transactions. Letter of Acceptance Waiver and Consent No. 2019060694201 (July 1, 2021).
According to the AWC, between January 1, 2014 and December 31, 2018, 30 stockbrokers recommended for customers to collectively buy at least $5,000,000.00 in non-traditional exchange traded funds. The stockbrokers together executed six hundred purchases across 150 accounts. FINRA noted that most of these customers had moderate risk tolerances and objectives including income and growth. They held NT-ETFs for months if not years resulting in large losses.
The AWC stated that during this time, Sanctuary Securities did not put any adequate supervision system in place for monitoring non-traditional exchange traded fund recommendations. The AWC stated that there was no adequate system that Sanctuary Securities used to determine if NT-ETF recommendations were appropriate given each investor’s net worth, financial profile, risk tolerance, investment objectives, and age.
FINRA also noted that there was no training that stockbrokers underwent concerning non-traditional exchange traded funds even though there was a requirement on the securities broker dealer’s side for stockbrokers to complete training before making investment recommendations. There was no training provided to Sanctuary Securities’ supervisors either. This precluded stockbrokers and supervisors from knowing whether it was suitable for customers to be invested in NT-ETFs given the special risks and features of those investments.
The AWC stated that Sanctuary Securities used an exception report system which produced alerts when transactions appeared problematic. But the alerts or exception reports did not relate to any NT-ETFs. The trade review system used by the securities broker dealer did not identify whether investments were held for prolonged periods. Supervisors did not consider the extended holding periods as a factor for determining suitability. This resulted in customers holding the alternative investments for months or years. FINRA determined that Sanctuary Securities violated FINRA Rules 3110 and 2010 and National Association of Securities Dealers (NASD) Rules 3010(a) and 3010(b).
FINRA also sanctioned Sanctuary Securities for failing to review outside business activities of stockbrokers who registered with the firm between January of 2017 and January of 2019. The stockbrokers disclosed outside business activities to Sanctuary Securities, but those activities had not been evaluated to see if they were private securities transactions. FINRA determined that Sanctuary Securities violated FINRA Rules 2010 and 3270 for this reason.
According to the AWC, prospective customers of Sanctuary Securities were provided with prohibited information relating to three private placements. Investors reviewed private placement documents or information containing prohibited projections on future financial performance. FINRA rules restricted Sanctuary Securities from projecting or forecasting investment performance. Those forward-looking projections about investment returns were made by the securities broker dealer in violation of FINRA Rules 2010 and 2210.
The regulator also sanctioned Sanctuary Securities for failing to file private placement memoranda according to FINRA Rules 2010 and 5123, and for failing as placement agent to terminate a contingency offering and return investor funds in violation of FINRA Rule 2010 and Securities Exchange Act of 1934 Rule 10b-9.
