A broker-dealer failed to reasonably supervise its registered representatives when making recommendations of certain variable rate structured products (“VRSPs”), including fixed to floating rate steepeners and other variable rate principal-at-risk structured products, to 20 investors. The broker-dealer violated FINRA Rules 2111 (Suitability) and 3110 (Supervision). The behavior in question occurred prior to the adoption of Regulation Best Interest.
The broker-dealer recommended VRSPs to 12 customers with low or moderate risk tolerance. Although the broker-dealer’s written supervisory procedures (“WSPs”) required that customers sign a form confirming that they understood the risks of investing in VRSPs, no such forms were signed, and the recommendations to purchase the VRSPs were not reasonably supervised.
The broker-dealer also made recommendations of VSRPs resulting in concentrations of at least 25% in each of eight other customers’ accounts. Because VSRPs can make little to no interest for years, these recommendations were unsuitable. At that time, the broker-dealer had no exception reports or any other mechanism to prevent concentration of structured products, and did not conduct reviews to evaluate whether such recommendations were suitable for the customers.