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Regulatory Sanctions

FINRA Gets It Wrong in Undue Concentration Case

September 13, 2017

by Howard Haykin



A broker replaces her customer's diversified portfolio with a speculative, illiquid investment. So where is the oversight at the broker-dealer level? And how does FINRA justify its 'lite' sanctions


Geraldine Gordon agreed to a $7.5K fine and a 10-day suspension to settle FINRA charges that she recommended that a customer liquidate invest half of her liquid net worth in a single Master Limited Partnership.


BACKGROUND.    Gordon, a resident of Lexington, KY, has been registered since May 1994 – serving throughout her brokerage career as a General. Securities Rep with Ameriprise Financial Services. She had no formal disciplinary history.


FINRA FINDINGS.    In June 2013, Gordon recommended that her customer, “WF,” liquidate a number of diversified investments in her Ameriprise brokerage and IRA accounts, which comprised approximately half of her liquid net worth. Gordon then recommended that WF use the $334,000 in proceeds to purchase a single Master Limited Partnership focused on the energy sector. The MLP prospectus described the investment as speculative.


According to FINRA, Gordon's recommendations were unsuitable in light of the customer's financial condition, and because the investment represented an undue concentration of the customer's net worth.


FINANCIALISH TAKE AWAY.    Welcome back to another lesson in “WHERE’S THE SUPERVISION?”  A customer is directed to invest half her liquid net worth in a Master Limited Partnership, or MLP, which FINRA describes as “speculative” – in part because there’s a limited secondary market - and yet, there's no mention about a lack of oversight or supervision.


While it's appropriate for customers to view their brokers as a first line of defense against 'wayward' or unsuitable investments - with or without the fiduciary standard - the broker-dealer is undeniably a viable second line of defense.


So where's the logic in this case, where the broker gets a slap on the wrist, while Ameriprise and its supervisory personnel get … no sanctions? As such, I’ve got 2 problems with the 'verdict' in this case:


  • A $7.5K fine and a 10-day suspension sounds too light on 2 counts: (i) Gordon probably earned a hefty commission on the liquating and purchase transactions; and, (ii) If the MLP was as speculative and unsuitable as FINRA makes it out to be, then a larger and more punitive fine and suspension would have been in order.


  • Undue concentrations are easy to monitor and detect. So why wasn’t it picked up by Ameriprise Compliance? And if Ameriprise didn’t investigate the transactions to establish the customer’s comfort levels – which is probably the case because FINRA only issued sanctions against the broker – then why were the firm and Compliance personnel not sanctioned, as well?


Something smells with FINRA’s handling of this case, and it’s not pleasant.


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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016049353501.