The Financial Industry Regulatory Authority (FINRA) fined a dozen independent broker-dealers (IBDs) for failing to give their clients the proper discounts available to them, known as breakpoint discounts, on sales of unit investment trusts (UITs). They were also cited for related supervisory failures. Some of the biggest fines were levied against First Allied Securities Inc. (First Allied), Fifth Third Securities Inc. (Fifth Third), Securities America Inc. (Securities America), Cetera Advisors LLC (Cetera Advisors), and Park Avenue Securities LLC (Park Avenue).
FINRA ordered the 12 firms to pay both fines and restitution totaling $6.7 million. The other firms sanctioned were: Commonwealth Financial Network (Commonwealth Financial), MetLife Securities Inc. (MetLife), Comerica Securities (Comerica), Cetera Advisor Networks LLC, Ameritas Investment Corp. (Ameritas), Infinex Investments Inc. (Infinex), and The Huntington Investment Company (Huntington Investment).
A unit investment trust (UIT) is a type of investment company that typically issues redeemable securities (or “units”), like a mutual fund, which, according to the Securities and Exchange Commission (SEC), means that the UIT will buy back an investor’s “units” at their approximate net asset value (NAV) at the investor’s request. UITs have a termination date, upon which any remaining investment portfolio securities are sold and the proceeds are paid to the investors.
FINRA issued Regulatory Notice 04-26 in 2004 regarding UITs, which reminded broker-dealers to develop and implement proper supervisory procedures to ensure investors receive appropriate breakpoint discounts. Oftentimes, however, independent broker-dealers (IBDs), like First Allied, Fifth Third Securities, Securities America, Cetera Advisors, and Park Avenue Securities, are lax in their supervisory practices and procedures. The business model of these franchise operations is to open many offices nationwide for steady growth of fixed monthly revenues without the costs attendant to a full-service branch office. The registered representatives of these IBDs generally operate as separately incorporated businesses. They are not employees of the broker-dealer and therefore not controlled in the same manner as full-service brokerage firm representatives. The registered representatives control their structure and costs to maximize profits and often leave the protection of investors’ rights and interests as a low priority.
The typical supervisory organization of IBDs is to have independent contractors operate Offices of Supervisory Jurisdiction (OSJs) to monitor the registered representatives from geographically remote offices and then report to the main franchisor’s compliance office at national headquarters. The supervisors at the OSJs are not employees of the franchisor and often run their own brokerage, insurance and other businesses. They are not devoted full-time supervisors of the smaller branch offices. Consequently, OSJ managers cannot and do not supervise the day-to-day operations of the registered representatives of these IBDs.
Broker-dealers, including IBDs, must establish and implement a reasonable supervisory system to protect customers from broker misconduct. If broker-dealers fail to establish and implement these protective measures, they may be liable to investors for damages flowing from the misconduct. Therefore, investors who have suffered losses stemming from excessive sales charges, markups, and/or other misconduct by their broker can bring forth claims to recover damages against broker dealers like First Allied, Fifth Third Securities, Securities America, Cetera Advisors, and Park Avenue Securities, who should consistently oversee its employees’ activities in order to prevent broker misconduct, including the failure to properly apply breakpoint discounts to investors.
Were you overcharged in your investment account due to a broker-dealer’s failure to properly apply breakpoint discounts? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation. Mr. Pearce is accepting clients with valid claims against stockbrokers for excessive sales charges, markups, and/or other types of misconduct.
The most important of investors’ rights is the right to be informed! This Investors’ Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 35 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors’ rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at email@example.com for answers to any of your questions about this blog post and/or any related matter.