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FINRA Sanctions Huntleigh Securities Concerning Non-Traditional ETF Sales Practices

October 17, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned brokerage firm Huntleigh Securities Corporation (Huntleigh) concerning allegations that the firm failed to establish and maintain a supervisory system regarding the sale of leveraged as well as inverse leveraged exchange traded funds (Non-Traditional ETFs) reasonably designed to achieve compliance with applicable securities laws.

Huntleigh is a FINRA member firm since 1977 and has headquarter offices in St. Louis, Missouri. Huntleigh engages in general securities business and employs approximately 53 registered representatives across its five branch offices.

Non-Traditional ETFs contain drastically different risk qualities from traditional ETFs. While traditional ETFs simply seek to mirror an index or benchmark, Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on underlining assets, often attempting to generate 2 to 3 times the return of the underlining asset class. Non-Traditional ETFs can also be used to return the inverse or the opposite result of the return of the benchmark.

Former First Allied Broker Herbert Kaye Suspended for Unauthorized Trading

October 8, 2014 | by Staff Attorney

On September 15, 2015 FINRA suspended former First Allied broker, Herbert Leonard Kaye, for four months and fined him $25,000 which includes the disgorgement of $11,000 in commissions. According to FINRA, Mr. Kaye entered over 2,000 discretionary trades in the account of a customer between June 2010 and April 2013 without the customer’s prior written authorization, in violation of FINRA Rule 2010 and 2510(b). FINRA Rule 2010 states that “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”

In June 2010, Mr. Kaye’s customer realized a significant loss on the unsolicited sale of equities that she had inherited from her deceased husband. Following that sale the customer requested that Kaye recommend investments and investment strategies that would limit her exposure to large market fluctuations. The customer, who’s information was not disclosed, gave Mr. Kaye verbal authority to use his discretion to enter trades in her account without contacting her.

According to FINRA, Mr. Kaye did not obtain written authority to trade in her account. Moreover, First Allied’s written policies and procedures prevented discretionary trading except in limited circumstances. Nonetheless, between June 2010 and April 2013, Mr. Kaye executed over 2,000 discretionary trades generating over $173,000 in commissions.

SEC Cracks Down on Wrap Accounts to Prevent “Reverse Churning”

October 6, 2014 | by Staff Attorney

A recent InvestmentNews article explored The Securities and Exchange Commission’s (SEC) attempts to prevent conflicts of interest at registered investment advisers, a breach of their fiduciary duties, by focusing on potential misuse of popular flat-fee wrap accounts. The use of these accounts have given rise to claims of “reverse churning.” As we previously reported, “churning” is excessive trading activity or in a brokerage account. Churning trading activity has no utility for the investor and is conducted solely to generate commissions for the broker. By contrast “reverse churning” is the practice of placing investors in advisory accounts or wrap programs that pay a fixed fee, such as 1-2% annually, but generate little or no activity to justify that fee. Such programs constitute a form of commission and fee “double-dipping” in order to collect additional fees.

The SEC is looking into the practice by which clients pay an annual or quarterly fee for wrap products that manage a portfolio of investments. Investment advisors who place clients in such programs already charge fees based on assets under management (AUM) and the money management charges for wrap products are in addition to the AUM fee. According to InvestmentNews, the assets under these arrangements totaled $3.5 trillion in 2013, a 25% increase from 2012. Included in these numbers include separately managed accounts, mutual fund advisory programs, exchange-traded-fund (ETF) advisory programs, unified managed accounts, and two types of brokerage-based managed accounts.

Reverse churning can occur under these arrangements if there’s too little trading in the accounts in order to justify the high fees. In August, the SEC’s scrutiny of these products came to the forefront with the agency’s victory in a court case that revolved in part around an adviser’s improperly placing his clients into wrap programs. A jury decided in the SEC’s favor against the advisory firm Benjamin Lee Grant that the SEC argued improperly induced clients to follow him when he left the broker-dealer Wedbush Morgan Securities to his advisory firm, Sage Advisory Group.

FINRA Suspends former Morgan Stanley Smith Barney Broker Travis Shannon for Failing to Divulge Information

October 2, 2014 | by Staff Attorney

On August 25, 2014, FINRA suspended Travis S. Shannon, of Santa Barbara, California, formerly of Morgan Stanley Smith Barney. According to FINRA, from July 2010 through June 2013, Mr. Shannon engaged in two outside business activities without first providing written notice to Morgan Stanley, in violation of FINRA Rule 2010, 3030, and 3270. FINRA Rule 2010 states that “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” All members are bound to maintain high standards and according to FINRA Mr. Shannon fell short of that standard.

FINRA Rule 3030 states that “No person associated…shall be employed by, or accept compensation from, any other person as a result of any business activity…outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member.” This activity is known as selling away. Mr. Shannon was employed as a financial advisor with Morgan Stanley from September 2008 through July 2013 when he was allowed to voluntarily resign from the firm due to FINRA’s regulatory action. According to FINRA, Mr. Shannon participated in private sales of $1,885,000 worth of securities, including securities issued by his outside business activities. Mr. Shannon also failed to timely update his U4 registration form to timely report two bankruptcy filings.

In June 2010, Mr. Shannon first began to participate in the private sales of securities issued by TC, a company that bought and sold used computer network equipment. Mr. Shannon referred eight customers to this company including four Morgan Stanley customers. Those eight purchases totaled $775,000 in investments with commissions of $77,500 to Mr. Shannon. In July 2010, Mr. Shannon co-founded AAI or Aerobat Aviation, Inc., a start-up company that was to design and produce unmanned aerial vehicles. In 2012 and 2013 Mr. Shannon participated in the private sale of $500,000 worth of Aerobat Aviation Inc. stock.

Gana LLP is Investigating LPL Financial broker, Kenneth W. Schulz for Improper Conduct

September 30, 2014 | by Staff Attorney

On September 11, 2014, FINRA, permanently barred Kenneth W. Schulz, a former broker of LPL Financial from associating with any FINRA member. According to the Letter of Acceptance, Waiver and Consent, in June 2013, Kenneth W. Schulz directed a registered assistant to impersonate six of Schulz’s former customers in phone calls to his prior firm requesting that the customers’ accounts be liquidated so that they could invest through Schulz at his new firm Commonwealth Financial network.

Schulz informed each of his customers that their securities holdings could be transferred “in kind” to accounts with Commonwealth. The customers agreed to transfer their securities to Commonwealth and authorized Schulz to initiate the transfers.

After the customers agreed to transfer the securities, Schulz learned that the customers’ securities could not be transferred in kind because the managed funds were proprietary to LPL Financial. Rather than inform his customers that the securities had to be liquidated before their funds could be transferred, Schulz had his assistant pretend to be the customers and had the accounts liquidated without customer consent.

Advisor Raymond Clark Suspended Over Allegations of Securities Related Misconduct

September 17, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Raymond Clark (Clark) and imposed findings: (1) suspending the broker for three months and fined $6,000 for using his personal email account to communicate with a customer; (2) suspended for four months and fined $10,000 for making false statements to his firm; and (3) suspended for two months and fined $4,000 for failing to report a customer complaint to his firm. FINRA imposed the suspensions to run consecutively and suspended Clark for an additional three months in all supervisory capacities and ordered him to requalify by examination as a securities representative and securities principal.

According to Clark’s BrokerCheck, the broker was registered with Paulson Investment Company, Inc. from December 2008 through May 2009. From June 2007 through January 2009, Clark was registered with J.P. Turner & Company, L.L.C. From May 2009 until August 2010, Clark was registered with First Midwest Securities, Inc. Finally, from August 2010, through August 2014, Clark was registered with Dynasty Capital Partners, Inc. (Dynasty Capital). Clark’s background check also reveals two regulatory complaints and at least nine customer complaints. Only a relatively small percentage of brokers have any complaints on their records and fewer still have as many as Clark.

The complaints against Clark include claims of unauthorized trading, inappropriate use of margin, securities fraud, breach of fiduciary duty, unsuitable investments, churning, and misrepresentations.

FINRA Sanctions B. C. Ziegler and Company For Failure to Supervise Church Bond Sales (Part II)

September 12, 2014 | by Staff Attorney

This post picks up on our first article on The Financial Industry Regulatory Authority (FINRA) sanctioning brokerage firm B. C. Ziegler and Company (B. C. Ziegler) and ordering the brokerage firm to pay $150,000 on allegations that the firm failed to implement a supervisory system reasonably designed to ensure that material economic information regarding Church Bonds was disclosed to the firm’s brokers, trading desk, and customers.

FINRA found that while the firm maintained a Credit Watch List to check for delinquent and missed Church Bond payments, this list was only produced periodically and not every time a Church Bond issuer fell five weeks behind on its sinking fund payments. Accordingly, FINRA found that B. C. Ziegler violated NASD Rule 3010 by failing to establish and maintain a supervisory system reasonably designed to ensure that material economic information, such as delinquent sinking fund payments, was disclosed to the firm’s brokers and customers who were sold Church Bonds in secondary market transactions.

FINRA found that prior to September 2010, B. C. Ziegler did not inform its brokers, trading desk, or customers when an issuer was more than 30 days behind on its sinking fund payments, an indicator of financial distress. Further, it was alleged that from September 2010, through at least May 2012, B. C. Ziegler’s registered representatives and trading desk were informed only periodically when a Church Bond issuer fell five weeks behind on its sinking fund payments through the Credit Watch List causing B.C. Ziegler’s supervisory system to not be reasonably designed to consider material economic information in the pricing of Church Bonds in secondary market transactions. The result, FINRA found, was that the firm had similar pricing for secondary market trades in Church Bonds that were current and delinquent with sinking fund payments.

Broker Richard Lewis Formerly of LPL Financial Sanctioned Over Alleged Improper Use of Discretion

September 8, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Richard Lewis (Lewis) concerning allegations that Lewis exercised discretion in a customer’s account without obtaining prior written authorization from the customer. FINRA found that his conduct violated NASD Conduct Rule 2510(b) and FINRA Rule 2010.

Lewis first became registered with FINRA firm in 1989. Since then, he has been associated with several firms and from December 2010, to March 2013, Lewis was associated with LPL Financial LLC (LPL). Currently, Lewis is associated with J.W. Cole Financial, Inc.

FINRA alleged that from April 2012, to February 2013, while Lewis was associated with LPL, he effected approximately 81 discretionary transactions in the securities account of a customer without obtaining prior written authorization and without LP accepting the account in writing as discretionary.

Broker Spotlight – Mark Lisser Accused of Churning by at Least Three Customers

August 27, 2014 | by Staff Attorney

The law office of Gana Weinstein LLP is investigating a string of securities arbitration cases involving broker Mark Lisser (Lisser) which generally allege securities violations including churning, excessive use of margin, churning, unsuitable investments, and breach of fiduciary duty. All the cases have been filed before The Financial Industry Regulatory Authority (FINRA).

Lisser was registered with Prestige Financial Center, Inc. from February 2008, until November 2010. Thereafter, he was an associated person with Global Arena Capital Corp.

As a background “churning” occurs in a securities account when a dealer or broker, acting in his own interests and against those of his customer, induces transactions in the customer’s account that are excessive in size and frequency in light of the character of the account. In order to show that churning took place a claimant must demonstrate that the broker-dealer exercised control over the account and that the broker engaged in excessive trading considering the objectives and nature of the account.

FINRA Sanctions Salomon Whitney Over Non-Traditional ETF Sales Practices

August 13, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned Salomon Whitney, LLC (Salomon Whitney) concerning allegations from July 2008 through November 2009 the firm failed to establish and maintain a supervisory system reasonably designed to monitor transactions in leveraged, inverse, and inverse-leveraged Exchange-Traded Funds (Non-Traditional ETFs). Non-Traditional ETFs contained risks that increase over time and in volatile markets including risks of a daily reset, leverage, and compounding. FINRA found that Salomon Whitney failed to establish a reasonable supervisory system to monitor transactions in Non-Traditional ETFs, provide adequate formal training, and observe reasonable basis suitability guidelines by failing to perform reasonable due diligence to understand the risks and features associated with the products.

Salomon Whitney has been a FINRA broker-dealer since 2008 and the firm is headquartered in Farmingdale, New York where it conducts a general securities business. Salomon Whitney has approximately 19 brokers registered with the firm.

Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on an underlining asset, class of securities, or sector index. The leverage employed by Non-Traditional ETFs is designed to generate 2 to 3 times the return of the underlining asset class. Non-Traditional ETFs can also be used to return the inverse or the opposite result of the return of the benchmark.