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Quantitatively Unsuitable Trading for Elderly Customers
by Howard Haykin
WHAT WENT WRONG. Between January 2012 and September 2016 (the "Relevant Period"), the broker engaged in quantitatively unsuitable trading in the accounts of 3 senior customers: a widow, aged 95, and a married couple in their 70s.
Among the many similarities:
- Both the widow and the married couple each had a net worth in excess of $5 million.
- Each had several accounts at UBS, including a brokerage account.
- Each had the investment objective as ‘income and capital appreciation, and the risk profile as ‘moderate’.
- Trading in each account was based entirely on the broker’s recommendations.
During the Relevant Period:
- Annualized turnover rates: 16.07 for the widow; 25.84 for the couple.
- Annualized cost-to-equity ratio: 31.75% for the widow; 35.05% for the couple.
- Portfolio losses: $283,000 for the widow; $239,000 for the couple.
- Commissions and markups: $260,000 for the widow; $210,000 for the couple.
- The S&P 500 Index rose 70% from 1/6/2012 (1,278) to 9/30/2016 (2,168).
By virtue of the foregoing, the broker violated its suitability rules - NASD Rule 2310 and FINRA Rule 2111.
FINANCIALISH TAKE AWAYS. FINRA was unequivocal in its conclusion that the broker engaged in quantitatively unsuitable trading because he has actual or de facto control over the customers’ accounts and his trading was excessive and unsuitable given the customers’ investment profiles, including their ages and risk tolerances.
This case was reported in FINRA Disciplinary Actions for January 2019.
For further details, go to ... FINRA Disciplinary Actions Online, and refer to Case #2017052874401.