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Regulatory Sanctions

FINRA (Finally) Sanctions Registered Principal for Failing to Supervise

October 23, 2017

by Howard Haykin


But did FINRA go far enough? Probably not. After all, what's an appropriate sanction for a registered principal who failed to supervise over a 52-month period?


Daniel Hushek III agreed to pay a $10K fine and to not serve in a principal capacity for 15 months to settle FINRA charges that he failed to adequately supervise the sales practice of a registered rep who recommended and engaged in unsuitable trading of non-traditional exchange-traded funds (ETFs).


BACKGROUND.   Hushek, a resident of Bradenton, FL, has 14 years of experience with 5 firms. From 2005 until January 2017, Hushek was associated with G.F. Investment Services (“GIS”) as a General Securities Rep and a General Securities Principal. He also was registered as an Operations Professional from December 2011 through January 2017 through GIS. Hushek currently is not associated with a FINRA member firm; he has no relevant disciplinary history


FINRA FINDINGS.    Hushek failed to adequately supervise the sales practice of Richard Martin (FINRA AWC #2013035817701 – see Financialish, 6/20/17),” a registered rep who recommended and engaged in unsuitable trading of non-traditional exchange traded funds ("ETFs").


     Richard Martin's Misconduct.   From at least March 2011 through July 2015, Martin recommended to virtually all his customers that they invest almost exclusively in and hold for lengthy periods of time non-traditional ETFs - despite the attendant risks of holding non-traditional ETFs for more than one trading session. In March 2011, alone, Martin solicited and recommended to his 44 customers approximately 334 non-traditional ETF transactions in approximately 15 non-traditional ETFs.


By the end of that month, virtually all of his customers were heavily concentrated – i.e., ranging from 75% to 99% - in non-traditional ETFs. Moreover, from at least March 2011 through July 2015, Martin recommended that his customers hold those nontraditional ETFs in their accounts – which they apparently did.


Martin’s reasoning was his belief that an apocalyptic crash was to befall the financial markets. Of course, that never happened. As a result of RM's misguided advice, his customers incurred realized and unrealized losses of more than $2.4 million.


     And Where Was Hushek All This Time?   Throughout the Relevant Time Period. Hushek failed to reasonably supervise Richard Martin’s sales of non-traditional ETFs in several respects.


  • Hushek failed to ensure that sales of these products were suitable – i.e., by ascertaining whether or not Martin had a reasonable basis for recommending that his customers buy and hold non-traditional ETFs for long term periods.


  • Hushek failed to ensure that the risks were adequately disclosed to customers of continuing to hold these products long term.


  • Following consultations with others, Hushek ordered that Martin’s customers’ accounts be restricted from any trading, including liquidations of the non-traditional ETFs held in these accounts, which continued to sustain substantial losses.


►     That was in April 2011. Thereafter, Hushek did not make any attempts to contact the customers directly or to ensure that the risks of continuing to hold these products were disclosed to the customers.

►     Instead, Hushek simply caused GIS to send a letter to certain of Martin’s customers confirming their account objectives without any reference to or discussion of the attendant risks of holding these products long term.


These supervisory failures facilitated Richard Martin’s ongoing sales practice violations, which continued throughout the Relevant Time Period.


FINANCIALISH TAKE AWAYS.    The registered rep, Richard Martin, was barred from the industry. Not just because he pushed his customers into non-traditional ETFs, but because he tried to coordinate Hushek's testimony with his own during the FINRA investigation. Needless to say, Martin got what he deserved.


The same can't necessarily be said for Daniel Hushek or G.F Investment Services ("GIS").


  • G.F. Investment Services still has a clean disciplinary record on its CRD, which is surprising because the firm's WSP's are obviously deficient when it comes to monitoring for, and acting upon, basic compliance issues - like suitability, concentrated positions, and training of registered reps and supervisory personnel. At a minimum, the firm should have programmed into its internal control procedures automatic actions or safeguards for customer accounts that hold concentrated positions or take long-term positions in securities that are geared for speculative traders - whether or not its supervisors fulfill their responsibilities.


  • Daniel Hushek agreed to significant sanctions - pay a $10K fine and agree to not serve as a principal for 15 months. But shouldn't FINRA have suspended Hushek from association with any FINRA member in all capacities? After all, Hushek's actions and inactions OVER A 4-YEAR-4-MONTH PERIOD contributed directly to $2.4 million in losses by Martin's customers. Come on! Hushek's actions/inactions went beyond negligence. Shouldn't that have counted for something?


This case was reported in FINRA Disciplinary Actions for September 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2013035817702.