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Archive for January, 2019

FINRA Moves to Focus Attention on Suitable Investment Recommendations

On January 22, 2019, FINRA released its “2019 Risk Monitoring and Examination Priorities Letter” which identifies topics that FINRA will focus on in the coming year.

As always, suitability remains one of FINRA’s top priorities in the coming year.

Some of the specific areas on which FINRA may focus in 2019 include: (1) deficient quantitative suitability determinations or related supervisory controls; (2) overconcentration in illiquid securities, such as variable annuities, non-traded alternative investments and securities sold through private placements; and (3) recommendations to purchase share classes that are not in line with the customer’s investment time horizon or hold for a period that is inconsistent with the security’s performance characteristics (which could include, for example, a recommendation to purchase and hold a security that is intended for short-term trading or to engage in short-term trading in products designed primarily for long-term holding).

In addition, as the exchange-traded product (ETP) market continues to grow with novel and increasingly complex products, FINRA will evaluate whether firms are meeting their suitability obligations and risk disclosure obligations when recommending such products. These include leveraged and inverse exchange-traded funds (ETFs), floating-rate loan ETFs (also known as bank-loan or leveraged loan funds) and mutual funds that invest in loans extended to highly indebted companies of lower credit quality.

FINRA also noted that it remains concerned about securities products that package leveraged loans (e.g., collateralized loan obligations). Although these products are typically sold via private placement to qualified institutional buyers, firms that may be selling them to retail investors will be subject to review as to how such firms are supervising such transactions to ensure their compliance with applicable sales restrictions.

If you are an individual or institutional investor who has any concerns about your investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Wedbush Securities, Inc. and Founder Edward Wedbush Consent to Censure and $900,000 Fine by NYSE

NYSE Regulation filed a Statement of Charges on behalf of NYSE Arca, Inc. (“NYSE Arca” or “Exchange”) naming Edward W. Wedbush and Wedbush Securities, Inc. as Respondents. In order to resolve the matter, the Exchange entered into an Offer of Settlement and Consent with each Respondent. By stipulation of the parties, the Statement of Charges is amended to conform to the agreed upon terms of each Respondent’s Offer of Settlement and Consent.

In addition to serving as the president of Wedbush Securities, Mr. Wedbush spent several hours each trading day actively managing and trading in a number of accounts held by approximately 20 client relationships, including multiple discretionary customer accounts over which he had power of attorney (including accounts for relatives, friends, and Firm employees), as well as personal and proprietary accounts for affiliates of Wedbush Securities and Wedbush, Inc., the Firm’s parent company (of which Mr. Wedbush was also the largest shareholder) (collectively, the “EW Controlled Accounts”).

Despite Mr. Wedbush’s active trading in the EW Controlled Accounts, Respondents failed to implement adequate processes to monitor or supervise Mr. Wedbush’s order entry, trade executions, or trade allocations in the EW Controlled Accounts.  The absence of adequate monitoring or supervision of his trading activities allowed Mr. Wedbush to handle the EW Controlled Accounts in a manner that was not permitted for other traders at the Firm.

Mr. Wedbush’s trading violated numerous Securities Exchange Act of 1934 (“Exchange Act”) and NYSE Arca rules, including:

  • Exchange Act and NYSE Arca rules regarding account designation;
  • Exchange Act and NYSE Arca rules requiring firms to make and retain books and records;
  • NYSE Arca rules regarding order marking;
  • Rules relating to price adjustments on equity securities without formal processes or review; and
  • Rules relating to margin requirements.

Respondents’ violations resulted, in large part, from the Firm’s failure over a period of years to (i) establish and maintain a supervisory system, including written supervisory procedures (“WSPs”), reasonably designed to ensure compliance with laws, regulations, and rules relevant to Mr. Wedbush’s trading in the EW Controlled Accounts, and (ii) devote the resources required to supervise and monitor Mr. Wedbush’s trading in the EW Controlled Accounts.   In addition to the above violations, Wedbush Securities, for more than three years, also failed to implement adequate internal controls, including a system of follow-up and review, reasonably designed to detect and prevent potentially manipulative activity at the Firm more generally, including but not limited to wash sales, marking the open, and marking the close.

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