Sanctuary Ordered to Pay $530K Over Supervisory Failures at Broker-Dealer
Sanctuary Wealth, a fast-growing independent firm launched in 2018, has agreed to pay more than $530,000 in fines and restitution for its broker-dealer’s failures to supervise certain product sales, including leveraged exchange traded funds, and monitor brokers’ outside business activities, according to a Financial Industry Regulatory Authority settlement issued last week.
Sanctuary Securities was fined $160,000 and ordered to pay restitution of $370,161.39 plus interest for the various supervisory failures dating as far back as 2014 that were uncovered over multiple Finra examinations, according to a letter of acceptance, waiver and consent finalized on July 1.
The allegations occurred at Sanctuary’s regional broker-dealer predecessor, David A. Noyes & Co., which officially changed its name to Sanctuary last year, according to the Finra letter. Indianapolis-based Sanctuary has around 190 registered brokers and 35 offices, according to Finra.
A Sanctuary spokeswoman said no current Sanctuary employees or executives were involved in the allegations. She also said that Noyes had not disclosed the issues as part of its “reps and warranties” reports prior to the acquisition.
From January 2014 through December 2018, Sanctuary did not sufficiently “address the unique features and risks” related to solicited sales of inverse and leveraged ETFs (collectively, non-traditional ETFs) as required by suitability obligations under Finra Rule 2111, according to the Finra letter.
Around 30 brokers recommended customers purchase about $5 million worth of non-traditional ETFs, resulting in “significant” net losses for those who held their positions for “extended” periods of time. The firm, meanwhile, generated roughly $60,000 in commissions over the course of about 600 purchases in 150 customer accounts, the letter said.
The regulator also dinged Sanctuary for failing to have a “reasonable” system in place to monitor the suitability of brokers’ non-traditional ETF recommendations or train brokers about the products’ objectives during that time.
Sanctuary in October 2018 banned its brokers from purchasing any non-traditional ETFs for customers, Finra said.
The regulator separately last week settled with another former Noyes broker, Stuart L. Pearl, who agreed to a three-month suspension and $5,000 fine for improper sales of leveraged ETFs, according to a letter of acceptance. Pearl was “permitted to resign” from Noyes in 2019, according to BrokerCheck.
From January 2017 through January 2019, Sanctuary also failed to review and evaluate the outside business activities of about 15 registered representatives it had recruited and hired, Finra said. The firm violated Rule 3720 requiring broker-dealers to evaluate whether an outside business activity (OBA) could interfere or conflict with a broker’s responsibilities to the customer.
“As part of the registration process, each representative disclosed various OBAs to the firm in writing,” the letter said. “The firm, however, never evaluated the disclosed OBAs.”
From January through December 2018, Sanctuary also distributed sales materials for three private placement offerings that contained prohibited performance projections prepared by the issuer, Finra said. The communications in question included projections relating to multiples on investment capital, internal rate of return, and average cash-on-cash percentage return over a future 15-year period.
The projections were prohibited under Finra Rule 2210, which requires communications “not project investment performance, imply that past performance will recur, or make any exaggerated or unwarranted claim, opinion or forecast.”
From January 2017 through January 2019, Sanctuary also failed to timely file offering documents with Finra related to eight private placements sold by its registered representatives.
Finally, between April and August 2019, Sanctuary failed as a placement agent to terminate an offering of securities that did not meet a minimum contingency requirement under the terms of a private placement memorandum and return funds to investors, Finra said.
The issuer had sought to raise a total of $6 million for an investment in a senior living facility located in Florence, Kentucky, requiring that a minimum of $5 million investor funds be raised by April 30, 2019, specifying otherwise that all funds would be returned to investors without interest.
Although the contingency was not met by the deadline, Sanctuary did not terminate the offering and return investor funds at that time, but continued to solicit investments under a modified memorandum that “improperly” extended the termination date to July 31, 2019, and reduced the contingency to $4 million. Between April 30 and the new deadline, Sanctuary raised sufficient funds to meet the modified minimum, Finra said.
The firm was found in violation of Rule 10b-9 of the Securities Exchange Act of 1934, providing for the prompt return of investor funds in the event the contingency fails to be met by a specific date, and Finra Rule 2010 requiring high standards of commercial honor.