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NEWSLETTERS & ALERTS
A Quest to Hold Supervisors More Accountable
by Howard Haykin
ACTIVITIES OF REGISTERED REPRESENTATIVE #1. From January 2013 through March 2015, the Firm (or “B/D”) and the direct supervisor (or “Principal”) failed to reasonably supervise the Registered Rep (“RR#1”).
At the time of his hiring in January 2012, RR#1 had numerous reportable events disclosed on his Form U4, including several customer complaints alleging that he had made unsuitable recommendations in connection with the sale of UITs. The Firm placed RR#1 on heightened supervision for his entire period of employment at the Firm. That didn’t stop RR#1 from recommending excessive trades in at least 6 accounts belonging to 4 customers, including frequent and short-term trades of UITs and other products that had significant upfront costs and were intended to be long-term investments. Collectively, over a 2-year span, RR#1’s excessive trading resulted in $210,000 in commissions and $163,000 in losses.
ACTIVITIES OF REGISTERED REPRESENTATIVE #2. From August 2015 through April 2017, the B/D and the direct supervisor failed to reasonably supervise the Registered Rep (“RR#2”).
At the time of his hiring in January 2010, RR#2 had one customer complaint disclosed on his Form U4. By the end of May 2010, an additional 5 complaints were disclosed on his Form U4. That said, RR#2 managed to recommend excessive and unsuitable trades in the accounts of 3 customers – which collectively resulted in $173,476 in commissions and $290,238 in losses. Furthermore, RR#2 recommended that 4 other customers (each with accounts holding <$25,000) unsuitably concentrate their account holdings in a single, speculative security. One such customer, whose net worth was <$200,000, invested 100% of her account holdings in the stock. Collectively, these recommendations resulted in losses of $32,078 for the 4 customers.
FAILED SUPERVISION BY THE FIRM AND THE DIRECT SUPERVISOR. Examples of supervisory failures include the following:
- Though the Firm’s WSPs identified him as being responsible for reviewing the suitability of reps’ recommendations, the Principal did not perform suitability reviews, claiming instead that he relied on the Compliance Department to perform such reviews.
- Prior to May 2017, no one at the Firm reviewed the automated exception reports and alerts that were relevant to identifying excessive trading and unduly concentrated positions because the WSPs didn’t delegate who at the firm was responsible for that function; nor did the WSPs provide any guidance about how to use them.
- In lieu of reviewing monthly exception reports that identified high turnover rates and commission-to-equity ratios, the Firm relied on an "Active Account Report" that was manually prepared by an administrative assistant. However, this report was not reasonably designed to detect excessive trading because, for example, it failed to: (i) calculate the commissions or costs relative to the amount of equity in each account; and, (ii) identify patterns of potentially unsuitable levels of trading activity in accounts over time.
- Though RR#1 had been placed on heightened supervision for the entire time he was associated with the B/D, neither the Firm nor the Principal identified that RR#1 recommended excessive trades in at least 6 accounts belonging to 4 customers, including frequent and short-term trades of UITs and other products that had significant upfront costs and were intended to be long-term investments.
- Though RR#1’s trading raised numerous red flags and, in one year alone generated 65 exceptions on the monthly excessive trading exception report, no one at the Firm reviewed these reports.
- Notwithstanding the fact that RR#1’s customers frequently appeared on the Active Account Reports, neither the Firm nor the Principal took action to restrict RR#1’s trading, while the Principal never attempted to contact the 4 customers to see if they were aware of the level of trading in their accounts.
FINANCIALISH TAKE AWAYS. The Broker-Dealer in this case is Buckman, Buckman & Reid, a Little Silver, NJ-based FINRA member since 1989 that employs around 50 registered reps and has 2 branch offices.
The Direct Supervisor is Harry (Chip) Buckman, Jr., an SVP and one of the B/D’s owners. He holds the following registrations: (i) General Securities Principal; (ii) Registered Options Principal; (iii) Investment Banking Rep; (iv) Operations Professional; and, (v) Investment Banking Principal.
OUTRAGEOUS. If we’re to accept FINRA’s account of the case as being accurate, then it’s mind-boggling that over a 4-year period (January 2013 through April 2017) a firm and its designated principal failed to conduct basic, rudimentary supervision over its sales force. It's also OUTRAGEOUS that Buckman, Buckman & Reid was not fined for this long-running folly. Finally, it’s OUTRAGEOUS that Chip Buckman, Jr. was suspended from serving in a principal capacity, but not suspending in all capacities.
- If written supervisory procedures (WSPs) are to be viewed as a firm’s first line of defense against customer abuse, then firms and their delegated personnel must be held rigidly accountable for their adequacy.
- And if supervisory personnel are to be viewed as a firm’s second line of defense against customer abuse, then such individuals must be held rigidly accountable for oversight failures.
- And when customer abuse, as presented in this case, could have and should have been detected early on, then the apparent failure to adequately supervise a firm’s registered reps must be deemed to be a matter of gross negligence.
- Inasmuch as this case displayed wide-spread failure across the board, ...
IT’S TIME FOR FINRA TO STEP UP AND IMPOSE MEANINGFUL SANCTIONS – NOT JUST SLAPS ON THE WRIST.
For further details, go to ... FINRA Disciplinary Actions Online, and refer to Case #2018058266301.