Securities Lawyers Blog
According to records kept by The Financial Industry Regulatory Authority (FINRA) financial Broker Raymond Smith (Smith), currently associated with Smith, Brown & Groover, Inc., has at least one disclosable event. These events include one tax lien, alleging that Smith recommended unsuitable investments in different investment products including debt securities among other allegations and complaints.
FINRA BrokerCheck shows a final customer complaint on November 06, 2024.
Without admitting or denying the findings, Smith and his member firm consented to the sanctions and to the entry of findings that they recommended a trading strategy, developed by Smith, to their customers without fully understanding the features and risks of the strategy or the exchange-traded note (ETN) that the strategy primarily invested in, and without having a reasonable basis to recommend the strategy to any customer. The findings stated that the ETN was high-risk, complex, and designed to manage daily trading risk. The ETN’s prospectus and pricing supplement disclosed that it May not be suitable for investors who planned to hold it for longer than one day and that investors could lose all of their investment during a spike in volatility. Despite developing and implementing the trading strategy at the firm, Smith did not fully understand the ETN, including its basic features, such as how the issuer maintained its inverse exposure to the underlying volatility index or that the ETN was designed to achieve its stated investment objective on a daily basis. Furthermore, contrary to the guidance in the ETN’s disclosure documents, the firm and Smith invested customers in the ETN for extended periods of time, an average of 72 days, including through periods of high volatility. In addition, prior to its implementation, the firm and Smith conducted flawed testing of the trading strategy that relied on incomplete data and that over-estimated potential returns. As a result, the firm and Smith had a mistaken understanding of the risk/reward profile of the strategy. Customer accounts participating in the trading strategy were fully invested in the ETN when a surge in market volatility caused the ETN to drop in price and the issuer, in turn, to call the ETN. As a result, holders of the ETN, including the firm’s customers, suffered near total losses on their investments. The firm discontinued the strategy shortly thereafter. The findings also stated that the firm and Smith failed to reasonably supervise the suitability of the trading strategy by failing to establish and maintain a system, including WSPs, reasonably designed to achieve compliance with their suitability obligations. Smith was the firm’s only principal and solely responsible for its supervision. Despite recommending to its customers a trading strategy that invested in a high-risk ETN, the firm had no policy or procedure for conducting a reasonable-basis analysis for such a product. The firm also had no procedures to evaluate whether customers’ concentration in the strategy created a risk of loss inconsistent with the customers’ investment profiles. Although the firm had an informal concentration limit of 10 percent, that limit was not documented in the firm’s procedures and certain customers’ concentration limits exceeded that threshold. In addition, the firm and Smith did not reasonably train registered representatives regarding the trading strategy or the ETN.
When your financial advisor is providing advice they must adhere to the SEC’s Regulation Best Interest (Reg BI) rule and standard of care. Reg BI replaced the former ‘suitability’ rule and created a ‘best interest’ standard for brokerage firms and registered representatives. This Reg BI standard of care applies to registered representatives making recommendations to customers in the purchase, sale, or exchange of securities or the implementation of investment strategies involving securities and non-securities. The rule also applies to the handling of opening accounts such as account transfers and types of accounts being recommended to be opened. Reg BI is drawn from fiduciary principles that include an obligation to act in the retail investor’s best interest and the broker is prohibited from placing their own interests ahead of the investor’s interest.
There are several different aspects of the rule that brokers must comply with. One of which is the care obligations which requires brokers to form a reasonable belief that their investment advice and recommendations are in the retail investor’s best interest. The care obligations includes three components. First, the advisor must have an understanding of the potential risks, rewards, and costs associated with a product, investment strategy, account type, or series of transactions. Another aspect of the care obligation is focusing on the client’s specific needs which brokers must reasonable understand through obtaining information for the client’s investment profile. In completing a customer’s investment profile the advisor should include information such as the investor’s investment time horizon; liquidity needs; risk tolerance; experience with various investment vehicles; investment objectives and financial goals; assets and debts including outside investment accounts; marital status; tax information; age; and other relevant information that may be individual to the investor that the advisor would need to know to properly render advice or provide services. Using the foregoing information, the associated person then must consider reasonably available investment option to accomplish the investor’s goals as well as alternative investment options that may be cheaper or other important qualities. Finally, the advisor must conclude that there is a reasonable basis to believe that the recommendation being provided is in the investor’s best interest.
An advisor must understand the type of account, securities, and their client in order to meet their care obligations. The type of securities account has the potential to greatly affect retail customers’ costs and investment returns. Different types of securities accounts can offer different features, products, or services, and not all types of accounts or services would be in every investor’s best interest.
Smith entered the securities industry in 1981. Smith has been registered as a Broker with Smith, Brown & Groover, Inc. since 1981.
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.
