Former J.P. Morgan Securities LLC Financial Advisor, Paul Zakhary, Suspended and Fined By FINRA Over Suitability Rule Violations
Paul Zakhary (CRD No. 6399894) was a general securities representative at J.P. Morgan Securities, LLC from 2017 until his separation on September 4, 2019. The member firm reported the separation to the Financial Industry Regulatory Authority (FINRA) based on Paul Zakhary’s “violating the Firm’s switch policy related to annuity surrenders and managed brokerage transactions.”
According to publicly available records accepted by the Financial Industry Regulatory Authority (FINRA), on December 24, 2020, Paul Zakhary was suspended for three months and fined $5,000 for making unsuitable recommendations to three customers and caused inaccuracies in the member firm’s books and records.
According to the FINRA sanction, “Respondent hereby accepts and consents, without admitting or denying the findings and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of FINRA, or to which FINRA is a party, prior to a hearing and without an adjudication of any issue of law or fact, to the entry of the following findings by FINRA:
“Between January and August 2018, Zakhary made recommendations to three customers to sell variable annuities and replace them with fixed annuities. Zakhary lacked a reasonable basis for making the recommendations that the customers sell their variable annuities because he did not sufficiently understand the transactions, and as a result failed to execute 1035 exchanges. By making the recommendations without a reasonable basis, Zachary violated FINRA Rules 2111 and 2010. When Zakhary submitted the required documentation to purchase the fixed annuities to J.P. Morgan, he failed to identify the variable annuities as a source of funds used to purchase the new annuities. By failing to accurately complete these forms, he caused the firm to maintain inaccurate books and records.”
For a copy of Paul Zakhary’s FINRA disciplinary action details, click here.
Summary Detail of Allegations
Specifically, the FINRA sanction stated, “Between January and August 2018, Zakhary recommended that three customers liquidate their variable annuities and use the proceeds to purchase fixed annuities. Zakhary advised the customers to liquidate their variable annuities directly with the issuing company and assisted them with that process. The customers then deposited the proceeds with J.P. Morgan. On Zakhary’s recommendation, each of the customers used the proceeds of their variable annuity liquidations to purchase fixed annuities through J.P. Morgan.
“At the time he made the recommendations, Zakhary lacked a reasonable understanding of the variable annuity products. Zakhary did not understand or consider the different subaccount investment options available within the variable annuity products before recommending the liquidations. Further, he did not understand when and how to execute a 1035 exchange to avoid immediate tax consequences for the customers when liquidating the variable annuities. As a result, 1035 exchanges were not utilized for the customers and taxes became due on the proceeds immediately, rather than being deferred.”
The FINRA sanction goes on to add, “When Zakhary submitted the necessary documentation to J.P. Morgan to purchase the fixed annuities for the three customers, he failed to accurately complete the forms. When identifying the source of funds used to purchase the fixed annuities, Zakhary failed to disclose that a portion of the funds used to purchase the fixed annuities came from the liquidation of variable annuities. As a result, J.P. Morgan was not aware of the failure to execute 1035 exchanges until a customer complained over a year later, after preparing his taxes.”
Why Violating the Suitability Rule Is a Risk to Investors
When recommending a transaction or investment strategy, brokers are obligated by FINRA’s suitability rule to ensure their activities meet three standards: customer-specific suitability, quantitative suitability, and reasonable basis suitability. When a broker doesn’t understand the potential risks or rewards of a given security or investment strategy, it’s considered a violation of suitability. Brokerage firms have a regulatory obligation to supervise Financial Advisors’ sales practice activities.
The Wolper Law Firm represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies, and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at 866.931.8452 or by email at firstname.lastname@example.org.