by Howard Haykin

JAMES FLEMING III (AWC #2013035035902) agreed to a $10K fine and a 4-month suspension to settle FINRA charges that, in connection with 2 customers’ accounts, he repeatedly recommended that the customers purchase UITs and then sell them well before their maturity dates.

BACKGROUND.   Fleming, a resident of Paxton, MA, has 39 years’ experience with 8 firms. From 2005 to 2016, he was associated with Investors Capital; from 2016 to July 2017, he was with Questar Capital. Fleming holds a Series 7 license and had no prior regulatory disclosures.

FINRA FINDINGS.   Between June 2010 and December 2014 (the ''Relevant Period"), Fleming engaged in a pattern of short-term trading of UITs in 2 customers' accounts.

The UITs that Fleming recommended had maturity dates of 24 months or longer and carried significant sales charges. Nevertheless, on 177 occasions, Fleming recommended that his customers sell their UIT positions within 8 months of their purchase. The holding period for the UITs ranged from 3 and 235 days, with an average holding period of only 96 days.

In addition, on several occasions, Fleming recommended that his customers use the proceeds from the short-term sale of a UIT to purchase another UIT with similar investment objectives. Fleming’s recommendations caused the customers to incur unnecessary sales charges and were unsuitable in view of the frequency and cost of the transactions.

ELAINE LACERTE (AWC #2016051367201) agreed to a $5K fine and a 6-month suspension to settle FINRA charges that she engaged in an unsuitable pattern of short-term trading of UITs in customer accounts.

BACKGROUND.   LaCerte, a resident of Colorado Springs, CO, has 30 years’ experience with 6 firms. From 2005 to 2009, she was associated with Citigroup Global Markets; from 2009 to 2016, she was associated with Morgan Stanley. LaCerte holds the Series 7 and Series 31 (Futures Managed Funds) licenses, and she had no prior regulatory disclosures.

FINRA FINDINGS.   From July 2012 through December 2014 (the "Relevant Period"), LaCerte engaged in an unsuitable pattern of short-term trading of UITs in 107 customer accounts.

Ms. LaCerte repeatedly recommended that the customers purchase UITs and then sell these products well before their maturity dates. The majority of the UlTs that LaCerte recommended had maturity dates of at least 24 months and carried sales charges ranging from 1 .95% to 3.95%. Nevertheless, she repeatedly recommended that her customers sell their UIT positions less than a year after purchase – with the average holding period for these UITs of less than 300 days.

In addition, on more than 100 occasions, LaCerte recommended that her customers use the proceeds from the short-term sale of a UIT to purchase another UIT with identical investment objectives.

GLENN KING (AWC #2015044444801) was barred from the industry, in a final decision issued by FINRA National Adjudicatory Council, or NAC, based on findings that he excessively traded UITs and CEFs (Closed-End Funds) in customer accounts. The NAC decision followed King’s appeal of a FINRA Hearing Officer’s default decision issued in June 2016.

BACKGROUND.   King, a resident of Marlboro, NJ, has 21 years’ experience with 7 firms. From January 2012 to June 2015, he was associated with Buckman, Buckman & Reid. According to FINRA BrokerCheck, King had 20 customer dispute disclosures, most of which were settled.

FINRA FINDINGS.   The NAC affirmed the Hearing Officer’s findings of liability as it pertains to excessive trading and improper exercise of discretion in customer accounts for the 2-year period, 2013 to 2014. During the time he was associated with Buckman, Buckman & Reid, King pursued a short-term trading strategy in the accounts of 4 BBR customers by repeatedly selling UITs and CEFs less than one year after purchasing them and, in some cases, one month after purchasing them, and using the proceeds to buy other UITs and CEFs.

Notwithstanding the long-term nature of these investments, King typically held the investments in the customers' accounts 4 months or less. Upon selling the UIT and CEF investments, King would immediately use the proceeds of the sales to purchase other newly issued long-term investments. This conduct resulted in the customers' incurring additional, unnecessary charges.

Additionally, King's short-term trading was not suitable on a customer-specific basis. Three of King's BBR customers were retired and 2 were 67 years old. None of the 4 BBR customers was willing to accept significant risk. Two sought balanced/conservative growth with a risk tolerance of either conservative or moderate. The remaining 2 customers sought growth with a moderate risk tolerance. None of the four BBR Customers had a net worth greater than $1 million.

All told, the annualized turnover rates in these accounts ranged from 3.16 to 7.07, and the fact that King did not trade stocks, but instead traded UITs and CEFs which carry higher associated costs, adds to the egregiousness of King's excessive trading.

FINANCIALISH TAKE AWAYS.    UITs and CEFs are “buy-and-hold” investments, and sales of these securities in a customer’s account raise large red flags. Using the proceeds from sale of a UIT or CEF to purchase a similar investment raises a larger red flag. And repeated buying and selling of UITs or CEFs are causes for alarm.

So, where were the respective broker-dealers for the above-named individuals?

• Investors Capital Corp. – when James Fleming traded UITs in 2 customer accounts from 2010 to 2014;
• Citigroup Global Markets – when Elaine LaCerte traded UITs in 107 customer accounts from 2012 to 2014; and,
• Buckman, Buckman & Reid – when Glenn King traded UITs and CEFs in 4 customer accounts from 2013 to 2014?

Well, we have good news and bad news. According to FINRA BrokerCheck, Investors Capital Corp. agreed to settle FINRA charges that, through certain of its registered reps, it recommended unsuitable short-term trading of UITs and Steepener Notes in the accounts of customers. The settlement cost Investors $250K in fines and $841K in restitution to customers. (AWC # 2013035035901, 10/3/16)

The bad news: neither Citigroup Global Markets nor Buckman, Buckman & Reid were ever sanctioned for similar violations.

THAT IS NOTHING SHORT OF DISGRACEFUL – not to mention a serious red flag into the oversight of FINRA as a regulator.

These cases were reported in FINRA Disciplinary Actions for October 2017.

For details on any case, go to ...  FINRA Disciplinary Actions Online, and refer to the Respective Case Number.