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Regulatory Sanctions

Too Few Supervisors for Too Many RRs and V/A Contracts

February 5, 2019

by Howard Haykin


Think you have way too much supervisory ground to cover? How about Cadaret Grant which, for a time, employed just 3 individuals to review the suitability of transactions for 676 registered reps working out of 456 branch offices.
The Syracuse, NY-based broker-dealer agreed to pay an $800K fine to settle FINRA charges that it failed to establish a reasonably-designed supervisory system with respect to numerous areas of its business – most notably, it failed to devote sufficient resources to the supervision of variable annuity transactions.  Cadaret also had to retain an independent consultant to conduct a comprehensive review of its deficient supervisory policies and procedures.
Here’s “What Went Wrong” at Cadaret Grant.



FAILED TO DEVOTE SUFFICIENT RESOURCES TO SUPERVISION OF FIRM PERSONNEL.    From August 2012 through May 2017, Cadaret Grant failed to adequately review for suitability the securities transactions effected by 656 registered reps who operated out of 456 branch offices. Too few personnel were assigned to conduct required supervisory and compliance reviews, and the firm provided resources that were insufficient for these individuals to adequately complete their assigned tasks.


1.   In Practice, Supervising Principals Could Not Effectively Review for Suitability.


  • Cadaret did not employ enough supervising principals – e.g., one Firm principal employed in the home office was the designated supervising principal for more than 320 representatives.
  • Supervising principals were expected to review for suitability in customer accounts by manually reviewing daily trade blotters; however, the blotters were not designed to identify patterns of potentially unsuitable trading.
  • WSPs did not provide guidance on how supervisors should conduct this manual review.


2.   Compliance Personnel Could Not Effectively Review for Over-Concentration and Churning.


  • Cadaret employed only 3 compliance personnel to manually review weekly blotters for all 676 registered reps.
  • Compliance personnel were not provided with guidance as to how they should review blotter transactions to detect potential suitability violations, or what steps they should take when issues were identified.
  • Weekly blotters were deficient because the Firm filtered out (i.e., excluded) all transactions under $10,000 from the weekly blotter - meaning that compliance personnel reviewed on average less than 3% of the Firm’s 9,000 transactions each week.


3.   Compliance Department Examiners Could Not Effectively Branch Office Inspections … to detect and prevent violations by registered reps in those locations.


  • Cadaret employed too few examiners to detect and prevent violations by registered reps at branch locations; in 2014, for example, 3 compliance examiners were tasked with inspecting over 400 geographically-disperse branches.
  • Due to time constraints, branch inspections were conducted in a manner not reasonably designed to identify violative activity.



FAILED TO IMPLEMENT ADEQUATE PROCEDURES TO SUPERVISE VARIABLE ANNUITY RECOMMENDATIONS.    From August 2012 through August 2016, Cadaret sold nearly 9,300 individual variable annuity contracts ("V/As") to its customers – meaning that V/A sales played a significant role in Cadaret Grant's overall business.


1.   Registered Reps Get Too Little Guidance on Selecting Different V/A Share Classes.


  • WSPs and training materials failed to provide guidance on the feature of various V/A share classes - notably B-share and L-share contracts – along with their associated fees and surrender charges.
  • Thus, reps lacked an adequate basis for making suitability determinations and lacked the needed tools to present customers with side-by-side comparisons of the various available share classes.
  • Reps and principals lacked sufficient guidance regarding the sale of long-term income riders with multi-share class V/As.


2.   Supervisors Could Not Adequately Review V/A Exchange Transactions.


  • Cadaret did not have surveillance procedures for identifying possible inappropriate rates of V/A exchanges – and instead relied on individual reviews of V/A transactions by Firm principals as the sole means to identify trends concerning high volumes of V/A exchange transactions.
  • Supervising principals were not provided with guidance or tools to assist in evaluating whether exchange rates were excessive – such as exception reports, trend analyses or historical rates of exchange.



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

For further details, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2014039071101.