Stifel Nicolaus a securities broker dealer headquartered in Saint Louis Missouri has been censured and fined $1,750,000.00 by Financial Industry Regulatory Authority (FINRA) founded on findings that (1) Stifel Nicolaus failed to supervise customers’ unit investment trust transactions which led to seemingly inappropriate and unwarranted sales charges and (2) Stifel Nicolaus provided customers with wrong information in regard to the costs of unit investment trust transactions. Letter of Acceptance Waiver and Consent No. 2016050948201 (May 27, 2020).
According to the AWC, between January of 2012 and December of 2016, the securities broker dealer executed about $10,900,000,000.00 in unit investment trust transactions which produced $206,300,000.00 in sales charges. The AWC stated that $935,200,000.00 in unit investment trust proceeds involved early rollovers. In those cases, unit investment trusts had been sold more than 100 days prior to their maturities, with all or a portion of the proceeds being used to make new unit investment trust purchases.
FINRA stated that $186,700,000.00 in unit investment trust proceeds involved series-to-series rollovers. In those cases, the unit investment trusts were sold 100 days before they matured, with proceeds being applied towards the purchase of a newer series of the same unit investment trust. The AWC indicated that the newer series contained the same objectives or remarkably similar objectives as the series that came before it.
FINRA determined that Stifel Nicolaus neglected to create and implement an adequate supervision system or written supervisory procedures with a view towards ensuring appropriateness of unit investment trust rollovers including series-to-series rollovers. The AWC stated that the securities broker dealer required a unit investment trust switch letter to be completed in situations where positions were being sold before maturity to purchase other mutual funds or unit investment trusts. The purpose of the switch letter was to ensure that the customer was cognizant of the expenses and risks. But the company failed to provide any guidance on when these switch letters should be provided to customers. The written supervisory procedures were silent as to the way in which its supervisory personnel should conduct reviews to determine if unit investment trust rollovers were possibly unsuitable.
FINRA stated that Stifel Nicolaus relied upon a Switch Alert which was supposed to identify if there was an early rollover of a unit investment trust or if there was a switch from the unit investment trust to a mutual fund. This Switch Alert was defective in that it did not actually flag switches between one unit investment trust to another. At no point between January of 2012 and December of 2016 did the securities broker dealer inform its supervisory personnel about the Switch Alert’s defectiveness.
The AWC stated that an alternative method for determining problematic switches had been used by Stifel Nicolaus but this method was also defective. FINRA stated that the method was not adequately geared towards identifying inappropriate switches because of it only calling attention to those transactions in which the unit investment trusts had been held for under twelve months. This precluded the system from identifying problematic switches where a unit investment trust with a longer maturity had been sold after twelve months but still well before maturity. FINRA stated that Stifel Nicolaus’ alternative method stopped working altogether by May of 2015.
Stifel Nicolaus’ supervisory failures possibly caused its customers to experience $1,891,188.13 in unnecessary sales charges. The securities broker dealer violated FINRA Rules 2010 and 3110 as well as National Association of Securities Dealers (NASD) Rule 3010 for its supervisory failures.
The AWC also stated that between January of 2012 and December of 2016, Stifel Nicolaus provided at least twelve hundred unit investment trust switch letters that pertained to rollovers. These forms were supposed to be signed by the customers to evidence their understanding of risks and expenses. Aside from an ad hoc review that occurred during a branch inspection, there was no mechanism utilized by the firm to determine whether the information contained within the unit investment trust switch letters was accurate.
FINRA stated that more than half of the switch letters contained either false information about the costs that customers would incur through switching or had contained insufficient information regarding the costs. The regulator indicated that sales charges were understated by more than 49 percent on average. The AWC revealed that in one case, a customer was told that the cost of a switch was $1,000.00 when it was nearly $2,000.00. FINRA determined that customers experienced $1,249,052.00 in sales charges when the switch letters indicated that the sales charges would only be $330,440.00.
