FINRA issued a $50K fine to InterSecurities, Inc. nka Transamerica Financial Advisors and required the firm to certify on, and submit copies of, its policies, systems and procedures in place for new products that it expects to offer customers.  FINRA also wants a written description of these pols, systems and procedures.  In particular, FINRA seeks to know how the firm determines whether new products are securities and, once that determination is made, whether adequate pols and procedures are in place to enable the firm to comply with applicable securities rules and regs.    [C-I Note:  Preferably, they'd be covered in one place - the WSP.]. 

    FINRA Findings, Allegations.   InterSecurities allowed its RR's to recommend a "Stock to Cash" (STC) program, under which customers would pledge stock to obtain loans that were in some instances used to purchase other products - primarily fixed or indexed annuities.  It was marketed as a non-securities product, The firm did not monitor use of the Stock to Cash program or otherwise inquire into the program’s activities.

Mistake #1.  Firm thought the STC program was not a securities product, and thus concluded STC sales didn't need to be approved.  Some firm customers entered into Stock to Cash loans, pledging securities worth more than $4.3 million and borrowing more than $4.1 million.  FINRA acknowledged that no customers were deprived of any profits to which they were entitled, because almost all of the loans that have come due to date were secured by stocks that lost money during the loan period. [C-I Note:  Customers apparently were lucky - as noted below, due diligence was 'non-existent'.]

Adequate due diligence was lacking, however.   Neither RRs nor firm management conducted adequate due diligence into the STC program prior recommending it to customers.  RR's never ascertained how the pledge stock would be used and incorrectly concluded that customers would retain complete ownership interest over the stock or that the stock was held by an “investment grade” 3rd party with a right of recourse by the client if the holder went out of business. 

Firm further failed to look "under the lender's hood" - i.e., into the lender’s financial condition, upon which customers were depending for the return of their securities or payment of their profits, and the firm never spoke with anyone associated with the lender, and never learned what the lender actually did with the stock.  As a result, RR's didn't understand the potential inherent risk in the program, and thus conveyed inaccurate and misleading information to their customers. 

This was FINRA Case #2007008935008, and was reported in:   [FINRA Disciplinary Actions for February]