Securities Lawyers Blog
According to records kept by The Financial Industry Regulatory Authority (FINRA) financial Broker Frederick Phelan (Phelan), previously associated with Drexel Hamilton, LLC, has at least one disclosable event. These events include one tax lien, alleging that Phelan recommended unsuitable investments in different investment products including debt securities among other allegations and complaints.
FINRA BrokerCheck shows a final customer complaint on November 18, 2024.
Without admitting or denying the findings, the firm, Ivcic, Mead, Phelan, and Steigerwald consented to the sanctions and to the entry of findings that the firm submitted retail orders for new issue municipal bonds without a basis for designating the orders as retail and with zip codes that were not associated with a retail customer. The findings stated that the firm participated in a number of offerings for new issue municipal bonds as a co-manager or a member of the selling group. The firm did not have retail customers for its orders of new issue municipal bonds. Rather, it submitted such orders on behalf of other broker-dealers who had, in turn, placed orders with the firm. On at least 572 occasions, the firm, through its representatives, submitted orders to the syndicate senior manager that it received from broker-dealer counterparties that it designated as retail without a basis to do so, and, to make it appear that the orders were for bona fide retail customers, included zip codes with the orders that were not associated with a retail customer. Additionally, on at least 44 occasions, the firm received orders from its broker-dealer counterparties that exceeded the $1 million per order maximum set out in pricing wires and, when it submitted the orders to the syndicate senior manager, split those orders into multiple, smaller orders to evade the limit set out in the retail period eligibility criteria. The sales of the bonds in violation of the retail order period rules generated significant commissions for the firm. The findings also included that Phelan and Steigerwald willfully violated MSRB Rules G-11(k) and G-17 by submitting order tickets with zip codes that were not associated with retail customers. On 46 occasions, Phelan included a zip code that was not associated with a retail customer on order tickets that he submitted to the firm. Similarly, on 127 occasions Steigerwald included a zip code that was not associated with a retail customer on order tickets that he submitted to the firm. FINRA found that the firm failed to establish and maintain a supervisory system, including WSPs, reasonably designed to ensure compliance with the retail period eligibility criteria. Though a significant portion of the firm’s business was participating in underwritings of municipal securities, the firm had no supervisory system in place to determine that the retail orders that it submitted during retail order periods were for genuine retail customers or that the zip codes its representatives submitted with the orders were accurate and associated with a retail customer purchasing the bonds. Moreover, the firm maintained WSPs that unreasonably contained no guidance on complying with the retail order period eligibility criteria set by issuing municipalities. The firm has since enhanced its supervisory systems, including its WSPs. As a result of the supervisory failures, the firm failed to detect the violations of MSRB Rule G-11(k).
Under the securities laws brokers are obligated to act in their clients’ best interests and provide only suitable recommendations for investments to the client. In addition, the SEC has promulgated ‘Regulation Best Interest (Reg BI)‘ which according to the SEC enhanced the broker-dealer standard of conduct beyond existing suitability obligations and requires broker-dealers to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities. Regulation Best Interest and the fiduciary standard for investment advisers are drawn from key fiduciary principles that include an obligation to act in the retail investor’s best interest and not to place their own interests ahead of the investor’s interest.
Brokers have an obligation to first obtain and evaluate sufficient information about a retail investor to form a reasonable basis to believe the account recommendations are in the retail investor’s best interest. Recommendations cannot be based on materially inaccurate or incomplete information. Every recommendation’s cost and investor details are always part of material information. Types of costs that must be considered including account fees, commissions and transaction costs, tax considerations, as well as indirect costs.
In addition to obligation to understand the customer the broker must also investigate the product being sold. FINRA firms have an obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings. A brokerage firm has a special relationship with a customer from the fact that in recommending the security, the broker represents to the customer that a reasonable investigation has been made. So, a brokerage firm should not depend solely on information from the issuer regarding a company, but must perform its own thorough investigation.
Another protective measure for investors is to mandate broker discloses. FINRA requires the broker to disclosure events such as customer complaints, IRS tax liens, judgments, investigations, terminations, and even criminal matters on their public BrokerCheck reports. FINRA has recognized that recent studies indicate future regulatory and customer complaint issues can be predicted for brokers who have experienced them before. FINRA’s Office of the Chief Economist (OCE) published a study showing the predictability of disciplinary and disclosure events based on past similar events. The OCE study showed that past disclosure events, including regulatory actions, customer arbitrations and litigations of brokers, have significant power to predict future investor harm. The data shows that where a member firm on-boards brokers with a significant history of misconduct there is a high likelihood that the broker will continue to engage in similar behavior.
Phelan has been in the securities industry for more than 14 years. Phelan has been registered as a Broker with Drexel Hamilton, LLC since 2010.
Investors who have suffered losses are encouraged to contact us at (800) 810-4262 for consultation. At Gana Weinstein LLP, our attorneys are experienced representing investors who have suffered securities losses due to the mishandling of their accounts. Claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.
