Wunderlich Securities, Inc., a FINRA member firm located in Memphis, Tennessee, was censured and fined $50,000 after consenting to Financial Industry Regulatory Authority (FINRA) findings that the firm had failed to establish, maintain, and enforce an adequate supervisory system and written procedures concerning the preparation and dissemination of consolidated reports, while also failing to supervise sales of nontraditional exchange traded funds. Letter of Acceptance, Waiver and Consent, No. 2013035334201 (Oct. 19, 2015).
According to the AWC, from April 12, 2012 through May 17, 2013, roughly fifteen of the firm’s Stockbrokers prepared and disseminated consolidated reports for customers. At that time, the firm’s written supervisory procedures had permitted the preparation and dissemination of the consolidated reports, but failed to address how the firm would actually supervise the use of such reports. The AWC indicated that the Firm had no reasonable supervisory procedures to ensure the accuracy of valuation information provided by the Stockbrokers in the reports. Further, the AWC indicated that the firm’s supervisory policies failed to enforce mandates for inclusion of specific disclosures concerning the source and accuracy of valuation information. Additionally, the firm reportedly failed to have supervisory procedures to ensure that supervisory reviews of the consolidated reports were preformed and documented by the supervisors and were available for review by the firm or regulators. FINRA found the firm’s supervisory failures to be violative of NASD Rule 3010 and Rule 2010.
Consolidated reports are documents provided by a broker to a customer that combines account information pertaining to most or all of the customer’s assets. They are designed to supplement, rather than replace, the customer account statements per NASD Rule 2340. FINRA’s Notice 10-19 specifically instructs firms that consolidated reports must be clear, accurate, and compliant with federal securities laws and FINRA laws. FINRA clearly warns that any firm which cannot adequately supervise the consolidated reports prepared by its Stockbrokers must prohibit dissemination of such reports and take appropriate steps to ensure the Stockbrokers comply with the prohibition.
Further, the AWC noted that from July 1, 2012 through March 31, 2013, the firm had permitted its Stockbrokers to recommend nontraditional ETFS; however, the firm’s supervisory procedure did not reasonably address the particular characteristics associated with such investments. Further, the firm reportedly did not use an effective system to report or enable supervisors to quickly identify instances where customers may be holding ETFs for an extended period of time. According to the AWC, the firm also failed to provide formal training to Stockbrokers and supervisors concerning unique characteristics and risks of the nontraditional ETFs. Consequently, FINRA found the firm’s supervisory failures in this regard to be violative of NASD Conduct Rule 3010 and FINRA Rule 2010.
Leveraged, inverse, and inverse-leveraged exchange traded funds are designed to return a multiple of an underlying index or benchmark, inverse of that benchmark, or both, over only the course of one trading session. Consequently, the performance of these non-traditional exchange traded funds can differ significantly from the performance of their underlying index, particularly when held longer than single trading sessions. According to FINRA, inverse and leveraged ETFs that reset daily are typically not suitable for retail investors planning to hold them for longer than one trading session, especially in volatile markets.
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 Stockbroker 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.
This is not the first time that Wunderlich has been disciplined for conduct of this manner. On November 21, 2011, the firm was fined $50,000 and censured after consenting to FINRA findings that they failed to review the personal trading of two research analysts in discretionary accounts that they held with other securities firms; that the firm issued thirty-three equity-security research reports that failed to contain disclosures mandated by NASD Conduct Rule 2711(h); and that the firm failed to include on its public website the disclosures mandated by NASD Conduct Rule 2210(d) and IM-2210-1(6)(A) pertaining to conflicts of interests. Letter of Acceptance, Waiver and Consent, No. 2010020967601 (Nov. 21, 2011).
Additionally, on May 27, 2011, the SEC issued an Order where the firm, its chief executive officer, and former chief compliance officer, were censured and fined for violations of the Investment Advisors Act of 1940 in connection with findings that the firm overcharged advisory clients for commissions and other transactional fees; failed to satisfy disclosure and client-consent requirements when engaged in principal trades; failed to adopt supervisory policies concerning the firm’s investment-advisory business; and failed to establish and enforce a code of ethics pertaining to the investment-advisory business. Admin. Proc. File No. 3-14403, Order Instituting Administrative Proceedings and Imposing Remedial Sanctions, Exchange Act Rel. No. 64558/Advisers Act Rel. No. 3211 (May 27, 2011).
Guiliano Law Group
If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esquire, and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.