Investors Capital Corporation, headquartered in Lynnfield, Massachusetts, was censured and fined $250,000.00 by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm engaged in the unsuitable recommendations of unit investment trusts and steepeners to customers. Letter of Acceptance, Waiver and Consent, No. 2010022046101 (Oct. 3, 2016).
According to the AWC, between June of 2010 through September of 2015, two stockbrokers associated with the firm engaged in unsuitable recommendations of unit investment trusts. FINRA stated in the AWC that unit investment trust investments are not generally intended for short term investing due to longer maturities and upfront sales fees.
In the firm’s case, The AWC stated that a total of nine-hundred and seventy-one transactions in unit investment trusts were effected by the registered representatives in eleven of the firm customers’ accounts. In many circumstances, these investments were held for shorter than one month. The representatives reportedly engaged in a short term trading strategy in which several of the transactions involved switching of customers’ assets from the proceeds of one-unit investment trust in order to fund another unit investment trust.
FINRA stated that in one case, an estimated sixty-five unit investment trusts (carrying maturities of two years on average) were bought and sold in one customer’s account, when such customer had long term growth investment objectives. Apparently, the customer, who held the unit investment trusts for three months on average, lost over $50,000.00 in connection with the transactions. In another example involving a sixty-eight-year-old investor, fifty-nine unit investment trusts were traded on a short term basis, triggering the customer to bear $32,607.00 in losses.
The AWC also reported that the firm made unsuitable recommendations of complex investments called steepeners, which are designed to provide investors with a return based on interest rate spreads. The AWC stated that these products, which provide for a combination of a fixed coupon payment for a specified timeframe and a floating interest payment thereafter, raised concerns from FINRA due to the potential illiquidity of such products in the secondary market. FINRA stated in the AWC that the products were typically unsuitable for trading in the short term.
Between April of 2011 and December of 2012, steepeners were recommended by two registered representatives of the firm in sixty-three customer accounts, where in some cases, the steepeners were only held for a month. Customers lost a reported $125,765.00 in connection with the steepener recommendations.
Ultimately, FINRA found that given the cost, size, and frequency of the transactions, the firm lacked an adequate basis to conclude that such unit investment trusts transactions were suitable for investors. Similarly, FINRA found that given the customers’ investment objectives and financial circumstances, the registered representatives failed to have an adequate basis in concluding that trading steepners in the short term was suitable for customers. FINRA stated that the firm’s unsuitable recommendations were violative of FINRA Rule 2010, FINRA Rules 2111, and NASD Conduct Rule 2310.
The AWC further reported that from January of 2009 through December of 2013, the firm did not detect and provide certain discounts of sales charges to customers pertaining to unit investment trust purchases, when such customers were eligible for such. According to the AWC, customers overpaid an estimated $472,876.00 in connection with the firm’s failure to properly provide such discounts in nearly two-thousand-unit investment trust transactions.
The AWC also stated that between January of 2009 through September of 2015, the firm did not have proper supervisory systems and protocols geared towards making sure that the registered representatives made recommendations in a suitable fashion concerning the steepners and unit investment trusts. The firm reportedly did not undergo the proper channels to train staff concerning costs, features, and risks associated with the investments. FINRA also noted that the firm did not follow up on alerts regarding registered representatives charging customers with excessive commissions.
The firm was also cited by FINRA for not having adequate supervisory procedures and systems that would enable the firm to detect when discounts on unit investment trusts purchases were to be provided. Particularly, the firm apparently relied on registered representatives to take proper steps to ensure customers received the discounts; however, the firm did not train such representatives on how to go about ensuring that customers would receive such discounts.
FINRA found that the firm’s aforementioned supervisory failures were violative of FINRA Rules 2010, 3110, as well as NASD Conduct Rule 3010. In addition to the fine and censure, FINRA ordered the firm to provide $841,532.97 in restitution to affected customers.
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