SEC, Finra Slam Indie B-D Cadaret Grant over Supervisory Failures
In separate enforcement actions issued on Tuesday, the Securities and Exchange Commission and the Financial Industry Regulatory Authority censured and sanctioned independent brokerage firm Cadaret Grant and executives more than $1.7 million combined for failing to properly supervise brokers’ sales of complex investment products.
The SEC on Tuesday censured and sanctioned the Syracuse, New York-based firm, its founder, Arthur Grant and a broker, Eugene Long, and levied a total of $938,194 in fines and disgorgement for allegedly unsuitable sales of an oil-linked exchange-traded note between 2015 and 2016. It also sanctioned the firm’s chief compliance officer, Beda Lee Johnson.
The penalties, including a $500,000 fine against Cadaret, will be used to reimburse customers for the $470,000 that the Commission said they lost as a result of the unsuitable sales of the VelocityShares 3X Long Crude Oil ETN, the agency said.
Grant, 75, and Johnson, 68, agreed to a 12-month supervisory suspension as well as a $100,000 fine and $75,000 fine respectively for failing to provide adequate resources to oversee brokers’ recommendations of non-traditional exchange-traded products despite “multiple indications” that the firm’s policies were not being followed.
Long, a 47-year-old Cadaret broker in Bryn Mawr, Pennsylvania, who sold the triple-leveraged oil-linked note to the highest number of customers, agreed to pay a $250,000 fine. Long and other brokers sold the leveraged ETF, which was intended for short-term daily trading, as a long-term investment for clients to hold until oil prices rebounded.
Long sold around $400,000 worth of the ETN to 30 of his 500 customers on and invested in it personally, the SEC said. He “misunderstood the critical features” and disregarded the prospectus disclosure that the product should only be used to “manage ‘daily trading risks.’”
“Brokers have an obligation to understand complex products and their risks before recommending them to customers,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, in a release. “As this action shows, we will continue to hold people accountable at every level for unsuitable recommendations that harm investors and for the failures that allow those recommendations to be made unchecked.”
The firm, which has 930 brokers in more than 500 branch locations, and the individuals settled the case without admitting or denying the allegations.
A spokesman for the Atria Wealth Solutions, which agreed to acquire Cadaret Grant in April, referred requests for comment to Cadaret Grant. The firm’s lawyer, Jeffrey Ross of Fried, Frank, Harris, Shriver & Jacobson, did not return a call for comment, and Grant, who will be moving into an advisory role as part of the acquisition, did not return a call for comment.
Long’s lawyer, Douglas Jensen of Park Jensen Bennett, did not return a call for comment.
In a separate settlement, Finra censured and fined the broker-dealer $800,000 for failing to properly supervise properly supervise “numerous areas of its business” and particularly cited failings with regard to brokers’ variable annuity recommendations, recording of emails and use of consolidated reports from August 2012 to May 2017.
“In large part, the Firm’s supervisory deficiencies stemmed from its failure to devote sufficient resources to the supervision of the Firm’s personnel,” Finra in the letter of acceptance, waiver and consent. “For example, during the Relevant Period, the Firm employed just three individuals to review for suitability the securities transactions of more than 676 representatives working from more than 450 branch locations.”
Over a four-year period, for example, Cadaret brokers sold 9,293 variable annuity contracts but “despite the significant role” annuity sales played in the firm’s business, it failed to responsible insure that brokers were recommending the proper share classes, specifically L-share variable annuities, which can be unsuitable for longer-term investors, Finra said.
Cadaret also failed to properly monitor brokers’ use of consolidated reports to clients to ensure they were entering accurate information and to properly retain client-related emails that brokers were sending with firm authorization from their personal accounts.
The firm, which settled Finra’s allegations without admitting or denying findings, also agreed to hire an independent consultant to review its policies, systems, procedures, staffing and training related to the regulator’s findings. Finra did not cite evidence of client harm in the settlement.