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Supervising for Suitability: A Cooking Lesson
by Howard Haykin
In a recent FINRA disciplinary case involving Moloney Securities Co., a registered rep overloaded (i.e., concentrated) the accounts of 5 senior customers with risky oil and gas (O&G) limited partnerships and oil and gas exchange traded funds. Purchasing these risky securities ran contrary to the customers' investment objectives, that included “balanced growth” and “preservation of principal/income." Furthermore, the registered rep acted like a Thanksgiving chef (who tries to fill every nook and cranny of a Thanksgiving turkey with stuffing) by cramming his customers' Moloney accounts with O&G securities - in some cases, over 90% concentrated - when of the accounts should have held diversified portfolios of securities.
Under FINRA Rule 2111 (Suitability), a recommended securities transaction or investment strategy may be unsuitable if it results in a customer's account being overconcentrated in a particular security or type of security that is inconsistent with the customer's investment profile.
WHERE MOLONEY WENT WRONG. According to FINRA, Moloney essentially failed to practice 'mise en place' by not having in place all the ingredients and equipment needed to operate an adequate supervisory system. While Regional Managers were responsible for conducting a daily review of all trades executed by registered reps, they were illy prepared to review for concentration in high-risk products or qualitative suitability.…
- The electronic surveillance system didn’t flag transactions for concentration issues; nor was the concentration questioned or reviewed by anyone at the Firm.
- While Regional Managers were generally instructed to review transactions for potential suitability concerns, they weren't provided with reasonable guidance, written procedures or training programs to address how to conduct those reviews.
- Moloney's written supervisory procedures (WSPs) contained only a cursory discussion of monitoring for qualitative suitability, including procedures related to speculative, low priced securities, and no discussion of concentration in high-risk products.
- Moloney did not train its Regional Managers on reviewing the suitability of recommendations in such products.
- Moloney never issued any instructional materials or alerts, such as compliance bulletins, addressing these issues.
[For further details on Suitability, click on … FINRA Rule 2111.]
[For further details, click on … FINRA Case #2015046315102.]
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