by Howard Haykin

At first blush, FINRA should have “thrown the book” at the broker – much the same way it has sanctioned many other brokers who allegedly took advantage of “elderly investors.” Yet, something in the details of this case seem to indicate there’s more to this story than what FINRA is telling us.  

THE PLAYERS.    A broker with 37 years’ experience and a 'spotless record' … joined the Houston, TX, office of Raymond James & Associates (“RJA”) in 2007. His spotless record - i.e., no fines or customer disputes - continued until 2012, when he supposedly began making “unsuitable recommendations.”

The customer opened an account at RJA in 2007 … and remained with the broker until 2016. According to her New Account records: (i) she was in her mid-70s, widowed, unemployed, and living on a fixed income; (ii) “income” was her primary investment objective and “medium” was her primary risk tolerance; (iii) “growth” was her secondary investment objective, and “high” was her secondary risk tolerance. Most of her net worth was held in her RJA account, which at the end of 2013 had a value of ~$790,000.

FINRA FINDINGS.    From July 2012 to October 2016 (the "Relevant Period"), the broker made unsuitable recommendations to his customer. During those 4 years, he recommended that the customer purchase numerous securities in the energy sector. In 2013, the customer turned 80 and, due to declining health, she appointed her daughter as her Power Of Attorney. Yet, despite those changes in circumstances, the broker “did not take reasonable steps to properly consider changes to the customer’s investment profile.”

By the end of 2013, even though approximately 50% of the customer’s account value was comprised of energy sector securities, the broker continued to recommend that his customer hold concentrated positions in the energy sector – which were unsuitable, given the high level of concentration and the volatility of the energy market. Ultimately, the customer realized losses in her account, and in 2016 she [the daughter, not the customer?] complained to RJA, seeking $752,000 in damages. RJA settled the complaint in December 2016 with a payment of $158,000.

In October 2016, Raymond James & Associates U5’d the broker, and he immediately joined Hurwitz Associates, an RIA (registered investment adviser) – where he is still currently employed.

APPARENT DISCONNECTS IN THIS CASE.    While the broker was charged with violating the suitability standards under FINRA Rule 2111, it remains somewhat baffling that FINRA would impose relatively light sanctions on this broker. That said, I offer the following suppositions or considerations to explain the reasons for FINRA's sanctions:

• FINRA appreciated this broker’s ‘spotless’ 43-year career and viewed his conduct to be unlike the conduct of other veteran brokers who had suddenly ‘turned on’ their customers. In those other cases, FINRA rarely hesitated to issue lengthy suspensions, effectively informing the brokers that their association with broker-dealers was no longer welcomed.

• FINRA determined that the broker had no apparent ulterior motive or intent to harm this customer – i.e., he did not engage in excessive trading, and no other customers expressed similar complaints.

• FINRA believed that the broker did not intend to harm or take unfair advantage of an elderly investor. If it had, FINRA’s response would have been immediate and ruthless.

• Notwithstanding FINRA’s diatribe about suitability, the investments and investment strategies in this account were deemed suitable for several years.
  • RJA, its compliance department, and its branch supervisor(s) had, for years, signed off on the investments in this customer’s account.
  • This being Houston, TX, concentrated positions in energy stocks might perhaps have been an acceptable norm.  [Note:  For the record, I would not recommend or endorse such investments or investment strategies.]
  • Fact is, this case originated only after the customer’s daughter (empowered with her POA) filed her complaint.
  • RJA settled the complaint with a payment to the customer, without asking the broker to contribute to the settlement.

• FINRA notes that the broker's violative conduct began in 2012, yet only refers to a decline in investment performance from December 2013 until October 2016. Lacking specific account details, I'm going to 'go out on a limb' and presume that the broker's concentrated energy industry strategy was been successful for a time (at least from 2012 through late 2013). [Note: If that was true, then FINRA seemingly resorted to cherry-picking the facts and circumstances of the case to support its conclusions - an unfortunate precedent.]

• FINRA was aware that this broker continued his financial services career, by associating with a Registered Investment Advisor.

This case was reported in FINRA Disciplinary Actions for December 2018.

For details the case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016050134501.