FINRA publishes a quarterly review to provide firms with a sampling of recent
disciplinary actions involving misconduct by registered representatives. The sample includes settled matters and decisions in litigated cases (National Adjudicatory Council (NAC) decisions and SEC decisions in FINRA cases). These summaries call attention to, and remind registered representatives and member firms of, specific conduct that violates FINRA rules and may result in disciplinary action.

“Recommending Unsuitable Transactions to a Customer”

Recently, FINRA settled a matter involving a registered representative who recommended an unsuitable transaction to a customer. When the customer became the registered representative’s client, she was a 53-year-old widow who worked as an administrative assistant. Her annual salary was approximately $55,000, she owned a home mortgage free and valued at approximately $500,000, and she had an investment portfolio valued at approximately $160,000 in retirement accounts and $100,000 in certificates of deposit. The customer told the registered representative that she intended to retire at age 60 with a pension and Social Security benefits. The registered representative prepared two proposed investment plans for the customer. One plan involved the customer taking a mortgage on her home, and the other did not. According to the registered representative’s recommendations, the customer would earn more money if she mortgaged her home and invested the proceeds.

On the registered representative’s recommendation, the customer mortgaged her home. The representative referred the customer to an affiliate of his member firm to obtain a mortgage, assisted the customer in completing the paperwork for obtaining a mortgage and received a referral fee of $1,225 The customer obtained a fixed-rate loan in the amount of $315,000 at 6.125 percent per year with a 30-year term and monthly payments of approximately $1,900. Because closing costs were financed in the loan, the proceeds of the loan were somewhat less than $311,000.

The representative recommended that the customer invest $300,000 of the proceeds in a variable annuity and further recommended certain fund allocations for the annuity. The representative received a commission of $4,725 on the annuity purchase. At the time of the recommendations, the registered representative knew that the customer would have to mortgage her home to act in accordance with his recommendations, and that she could not pay the monthly mortgage payments without using her other investment assets.

FINRA found that the representative did not have reasonable basis for recommending that the customer mortgage her primary residence to invest $300,000 in a variable annuity, given that the customer intended to retire in seven years, had limited income, expected an equally limited retirement income and would have insufficient monthly income to make the mortgage payments.

In conclusion, FINRA found that the registered representative’s conduct violated NASD Rules 2110‡ (ethical standards) and 2310# (recommendations to customers), and IM-2310-2#.

Also, FINRA fined the representative $5,000 and suspended him in all capacities for 10 business days.
(This Ends the FINRA Article.)

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