Robert N. Adrian of Memphis, Tennessee, a registered representative with Stifel, Nicolaus & Company, was fined $5,000 and suspended for forty-five days from association with any Financial Industry Regulatory Authority (FINRA) member in all principal capacities after consenting to findings that he failed to supervise a registered representative in a manner designed to detect the representative’s unsuitable trading in customer accounts. Letter of Acceptance, Waiver and Consent, No. 2012032916702 (Nov. 24, 2015).
According to the AWC, from April 2008 through April 2012, a registered representative, WC, which Adrian was responsible for supervising, implemented an unsuitable trading strategy and made recommendations to five customers to switch from mutual funds, including Class A Shares and Unit Investment Trusts to other mutual funds or UITs after holding the investments for a short period. The AWC stated that given the customers’ age, investment objectives, risk profile, and annual income, WC’s recommendations to switch between and among mutual funds, which included Class A Shares and/or UITs after holding the investments for a short period, was unsuitable and resulted in the accounts incurring high commission charges and account losses. FINRA found that WC’s conduct was in violation of NASD Conduct Rule 2110, FINRA Rule 2010, and NASD Conduct Rule 2310.
The AWC further reported that during the relevant period, Adrian was the branch manager at Stifel Nicolaus and responsible for the supervision of WC. FINRA found that Adrian, despite being alerted to potential suitability problems in the customer accounts by multiple Firm reports, had failed to take adequate action to follow up on the appropriate supervisory manner to determine if the transactions were suitable for five WC customers. Adrian reportedly failed to contact the customers directly regarding his concerns and instead primarily relied on WC’s explanations of the pattern of account activity. FINRA found that Adrian violated NASD Conduct Rule 2110, FINRA Rule 2010, and NASD Conduct Rule 3010(a) as a result of his aforementioned conduct.
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.
Firms and individuals, not surprisingly, are prohibited from unauthorized use of customer funds, borrowing of a customer’s securities or funds, forgery, non-disclosures or misstatements of material facts, and various deceptions and manipulations. Such conduct can also be found to violate criminal and other civil laws, and be subject to sanction from the federal and state government bodies.
FINRA Conduct Rule 2111 provides that a member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.
A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
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