Trident Partners, Ltd., a brokerage firm located in Woodbury, New York, was censured and fined $50,000.00 by Financial Industry Regulatory Authority (FINRA) based upon consenting to findings that the firm failed to supervise its staff, and authorized its registered representatives to make recommendations that were not suitable for customers. Letter of Acceptance, Waiver and Consent, No. 201203077752011 (July 18, 2017).
According to the AWC, between January of 2010 and January of 2012, the firm did not create and implement supervisory procedures and systems to make sure that steepeners were suitable for customers. During this time, the AWC stated that approximately one-thousand and six hundred transactions involving steepeners were effected in the firm’s customer accounts, which led the firm to accumulate ten percent of the commissions for its part in facilitating the transactions.
Steepeners were described in the AWC as complex structured products with longer-term maturities, with fixed initial rates and subsequent floating rates based on the spread between short-term and long-term rates. The AWC stated that these investments are often able to be called after approximately one year, and the failure to be called could reduce the investor’s floating rate to a point where the investor fails to earn a return and is exposed to liquidity risks within the secondary markets.
FINRA indicated in the AWC that the firm’s supervisory systems were inadequately designed in regards to the sale of steepeners to the firm’s customers. There were evidently no written procedures that the representatives were supervised that addressed the steepeners transactions. Moreover, there were no procedures that the firm reportedly underwent to analyze the products or otherwise complete a due diligence process on prior to effecting transactions. Consequently, there was no guidance or training provided by Trident Partners to the registered representatives to help them comprehend the features, benefits and risks of the products so that representatives could gauge the suitability of investments.
Apparently, steepeners were recommended by the registered representatives without the firm having the supervisory procedures in place to detect and prevent unsuitable transactions and over-concentrations of customer assets. FINRA found the firm’s supervisory failures to be violative of FINRA Rule 2010 as well as NASD Conduct Rule 3010(a) and (b).
Moreover, the firm was cited by FINRA for having an insufficient understanding of how steepener products exposed customers to risks. The AWC stated that the firm failed to grasp the risks of interest rate resets, and did not assess the probability of interest rate resets leading customers to earn nothing and suffer from illiquidity. FINRA determined that the firm’s lack of due diligence contributed to the firm’s lack of understanding of the steepeners’ rewards and risks. FINRA found the firm’s due diligence failures violative of FINRA Rule 2010 and NASD Conduct Rule 2310.
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