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Regulatory Sanctions

Oops! Broker Missed Fine Print in the CD Disclosure Statement

May 15, 2018

by Howard Haykin


Actually, disclosure statements don’t really represent or contain the “fine print” about new securities offerings. Instead, they contain integral terms and conditions, and beat ‘hands down’ anything that brokers and investors can glean from summary sheets.  But then, how many of us are inclined to read through an unabridged official document when a handout of “talking points” is available from the firm?


A broker with LPL Financial agreed to pay a $7.5K fine and serve a 20-day suspension to settle FINRA charges that he negligently made material misstatements in connection with the sale of 20-year interest rate-linked CDs to elderly customers. 


FINRA FINDINGS.    At the time this broker committed his alleged violative conduct, he had 17 years’ experience with 4 firms and held a Series 24 General Securities Principal license. So, he was no 'spring chicken. And, this is his first and only disciplinary event.


That said, according to the FINRA AWC: In December 2011, [the broker] received emails from LPL summarizing the terms of 20-year interest rate-linked certificates of deposit that LPL made available for sale. These emails described only some basic features of the CDs. The emails stated that the CDs provided for survivor benefits, but that certain restrictions applied to those benefits, without stating the nature of those restrictions. In fact, the survivor benefits of these CDs were subject to a material limitation that restricted the aggregate amount of early redemptions among all purchasers. This limitation was disclosed in the issuer's disclosure statement. [The broker], however, did not review the issuer's disclosure statement prior to selling the CDs.


Armed with (partial) information, the broker recommended the CDs to 2 elderly customers in December 2011 and to another 3 elderly customers in July 2012. In doing so, he misrepresented to these customers that their heirs would be permitted to redeem the CDs at full par value upon their death. The customers purchased CDs totaling $685,000.


Years later, however, the restrictive nature of the survivor benefits came back to bite the broker’s customers. When the estates of 2 of the customers tried unsuccessfully to fully redeem their CDs, the broker learned of his error with the survivor benefit limitation. That prompted him to advise the remaining 3 customers to sell their CDs in the secondary market.


All told, the 5 elderly customers or their estates suffered losses of approximately $75,000. All customers were made whole for any losses resulting from the CDs. In addition to the FINRA sanctions, the broker left LPL Financial after 18 years. Fortunately, he landed at Ameriprise.


This case was reported in FINRA Disciplinary Actions for April 2018.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015045703002.