Sporting a lengthy disciplinary record - 14 regulatory sanctions, 11 arbitration decisions - this Lynnfield, MA, broker-dealer, formed in 1992, settled FINRA charges related to its retail sales of collateralized mortgage obligations (CMOs).  Interestingly, while FINRA found the compliance practices of Investors Capital Corp. to be sorely lacking, it did not find instances where such sales were unsuitable.

[C-I Note: Ultimately, while FINRA detected no unsuitable transactions, the firm was heavily sanctioned for lacking what, FINRA deemed to be, adequate supervisory policies and procedures.  In the end, it would appear that the firm's existing track record played a part in the amount of the monetary fine.]

FINRA's Findings of Alleged Violations. FINRA deemed the firm's CMO systems and procedures to be inadequate because they did not address the increased risks associated with inverse floater and interest-only CMOs, which were sold to firm customers.

• ICC's maintained limited written procedures only required brokers to be knowledgeable about CMOs, in general, and only required generic disclosures to clients.
• Procedures failed to provide information to brokers re: specific risks associated with inverse floater and interest-only CMOs.  Nor did it advise them that such tranches were only suitable for sophisticated investors with a high risk profile.

As it pertained to supervisory personnel:

• WSPs failed to provide guidance to supervisors in connection with the sale of inverse floater and interest-only CMOs.
• WSPs failed to establish adequate supervisory measures to monitor suitability for these riskier CMOs.
• While FINRA didn't find any instances where unsuitable sales to customers of Inverse floater and interest-only CMOs, FINRA determined the firm's pols and procedures didn't provide for an adequate suitability review, including whether the purchasing customers were sophisticated or had a high risk profile - FINRA noted that some 40 customers weren't subject to an adequate suitability review.
• Suitability determinations by the firm did not take into account FINRA’s guidance regarding the additional risks inverse floater and interest-only CMOs posed.
• Firm's systems and procedures failed to require its brokers to offer to customers the educational materials required under NASD Interp. Material 2210-8, and, as a result, brokers involved in selling CMOs to retail customers were unaware of this requirement.
• In fact, FINRA found that the firm didn't offer any CMO-related educational materials to its customers, including prior to the sale of a CMO.

Fines and Sanctions. Perhaps owing to its disciplinary history, ICC was issued a $200K fine, ordered the firm to undertake a comprehensive review of its pols and procedures concerning suitability of CMOs, and ordered the firm’s Director of Compliance to certify in writing to FINRA within 60 days that it has engaged in a review and has in place policies and procedures to address compliance with this area. [FINRA AWC #2007011545201, Disciplinary Action for September 2011]