Finra Exacts Fines from Merrill, Cambridge Over Product Supervision
The Financial Industry Regulatory Authority has exacted fines totaling $850,000 from independent broker-dealer Cambridge Investment Research and from wirehouse Merrill Lynch regarding product supervision sales, and ordered Cambridge to return $3.1 million to investors in an alternative mutual fund that failed.
Cambridge gave its more than 4,000 independent contractor brokers access to the LJM Preservation & Growth Fund “without conducting reasonable due diligence and without a sufficient understanding of its risks and features,” including “a risky strategy that relied, in part, on purchasing uncovered options,” according to a letter of acceptance, waiver and consent Finra’s enforcement division published this week.
The LJM fund’s value plummeted 80% over two days in early February 2018, after brokers in the previous two years sold $18 million of its shares to more than 550 customers, prompted by sales calls in May 2016 from an LJM wholesaler, Finra said. The fund was liquidated and dissolved in March 2018.
Although the fund was on Cambridge’s watch list because of its small size and tenure, the firm did not identify it as an alternative or complex fund, adequately train brokers on the risks of alternative mutual funds nor impose any sales limitations, the consent letter said. One broker sold more than 80% of the shares, and some customers who bought them had conservative and moderately conservative risk tolerances.
Iowa-based Cambridge agreed to a $400,000 fine and to reimburse customers the more than $3 million, with amounts ranging from $2.77 to $87,255.03 in one account and $90,714.60 in another, according to Finra. The firm also certified that it has revamped policies, procedures and controls to remediate the issues cited in the letter.
“Without admitting or denying Finra’s findings, Cambridge entered into this Letter of Acceptance, Waiver, and Consent, in which FINRA notes Cambridge provided considerable assistance,” Cambridge spokeswoman Cindy Schaus wrote in an email.
Securities America, another independent broker-dealer that sold the LJM fund, also signed a consent order requiring it to pay a $100,000 fine and to reimburse $235,979.77 to investors, Finra said this week. The firm identified the fund as an “alternative” vehicle but did not follow with a heightened review of its strategy and risks, nor train brokers on its suitability for particular investors, the regulator said. A single Securities America broker sold $616,000 of the fund’s shares to 33 customers after the fund was added to the firm’s platform, Finra said.
J.W. Cole Financial, a smaller independent firm, similarly consented to a $50,000 fine and restitution of $163,527 to customers who bought the LMJ fund, according to a consent letter Finra posted on March 18. Since Cole relied relied solely on the due diligence conducted by its clearing firm to approve funds, it had no system to determine what constituted a complex or alternative product and did not train brokers or supervise their recommendations on the investment, Finra said.
Merrill Lynch agreed to a $450,000 fine, also without admitting or denying Finra’s findings that it failed to reasonably supervise the passage of information between “public and private side employees” in its Global Wealth and Investment Management unit, which includes its retail financial advisors, according to a consent letter Finra accepted last week.
The issue involved Merrill’s relocation of some employees involved with marketing third-party exchange-traded notes in 2013 to work alongside colleagues from the “private” capital-markets side of the ETN business, Finra said.
In late 2013, “employees on the private side” learned about “a price dislocation in a thinly-held ETN,” and at least one discussed it in an e-mail with two “public-side employees who did not have a need to know the information as defined by the firm’s policies,” Finra said.
The consent order did not say what the retail “public” side marketers did with the information, but charged Merrill with failing to give its “private side personnel” proper training about sharing “potential material nonpublic information.”
Although Merrill reviewed emails through a “general lexicon search” and targeted communications about Watch List and Restricted List securities, it did not have a process for escalating review of private-public side communications containing potentially material information, or for enforcing its procedures for physical separation of traders and marketers within its global wealth and global banking and markets divisions, Finra said.
Merrill’s $450,000 fine includes $90,000 to be paid to Finra and $360,000 to four exchanges where the notes were traded, according to the consent letter.
“We enhanced our policies and procedures five years ago,” said Merrill spokesman William Halldin when asked to comment on the sanctions.