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SEC Sanctions First Horizon Advisors, Inc. with Cease-and-Desist Order

(CRD#: 17117/ SEC#: 801-78594, 8-35061) First Horizon Advisors, Inc., is a Tennessee corporation with its principal place of business in Memphis, Tennessee. It has been registered with the Commission as a broker-dealer since 1985, and as an investment adviser since 2013.

Allegations of Misconduct

According to publicly available records released by the Financial Industry Regulatory Authority (FINRA), in September 2024, ordered a cease-and-desist on First Horizon Advisors, Inc. The proceeding arises out of First Horizon’s failure to comply with Regulation Best Interest (“Reg BI”), specifically Reg BI’s Compliance Obligation, which requires brokerdealers to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI. Exchange Act Rule 15l-1(a)(2)(iv).

Between July 1, 2020, and at least July 31, 2023 (“Relevant Period”), First Horizon did not maintain and enforce its Reg BI-related policies and procedures for structured notes that First Horizon’s registered representatives recommended to retail customers. First Horizon’s Reg BI policies and procedures applicable to structured note recommendations required its registered representatives to determine whether the customer’s investment profile met First Horizon’s requirements; to determine whether the resulting customer holdings would not exceed First Horizon’s concentration limit for that product type in the brokerage account; to submit to First Horizon customer-signed structured note disclosures; and to submit to First Horizon customer-signed letters when the customer liquidated holdings in certain products and used those funds to purchase a structured note.

First Horizon Corporation merged with IberiaBank Corporation in July 2020. Beginning in January 2021, Iberia Financial Services LLC (“merging broker-dealer”) terminated its preexisting networking arrangement and First Horizon integrated their operations. As a result, the customer accounts of the merging broker-dealer were migrated to First Horizon. First Horizon was aware several months prior to the integration that certain customer investment profile information would not map properly from the merging brokerdealer’s clearing firm to First Horizon’s clearing firm because of differing profile fields and that certain other information would not transfer at all. For over a year following First Horizon’s operations integration with the merging broker-dealer, First Horizon failed to maintain or enforce its Reg BI policies and procedures for the acquired customer accounts and the new First Horizon registered representatives that serviced those accounts. Additionally, new First Horizon registered representatives did not have access to First Horizon’s exception reporting site to review and clear exceptions related to their structured note recommendations to the retail customers whose accounts First Horizon had acquired in the merger.

In addition, for at least three years after the implementation of Reg BI in July 2020, First Horizon failed to create exception reports, or First Horizon’s registered representatives failed to clear exceptions, within the times specified in First Horizon’s policies and procedures.

As a result of these failures, First Horizon failed to maintain and enforce written policies and procedures reasonably designed to achieve compliance with the Compliance Obligation and willfully violated the General Obligation of Reg BI, found in Rule 15l-1(a)(1) of the Exchange Act (“General Obligation”).

Accordingly, pursuant to Sections 15(b) and 21C of the Exchange Act and Section 203(e) of the Advisers Act, it is hereby ORDERED that:

  1. Respondent cease and desist from committing or causing any violations and any future violations of Exchange Act Rule 15l-1(a)(1).
  2. Respondent is censured.
  3. Respondent shall, within 21 days of the entry of this Order, pay a civil money penalty in the amount of $325,000 to the Securities and Exchange Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3).

For a copy of the SEC Cease-and-Desist Order, click here.

What are Structured Notes

Structured Notes are market-linked investments that offer a coupon to investors from the date of purchase through the date of maturity (typically 24 months).  The payment of the aforementioned income is connected to the performance of underlying securities—typically individual stocks or stock indices.  In many cases, the notes are tied to the performance of between two or three underlying individual stocks.  The prospectus of the Structured Notes dictates that if all of the underlying individual stocks or the index remains at or above a certain price (i.e., the “Coupon Barrier”), all is good in the world and the investor will continue to receive the stated income payment.  If, however, one of the underlying stocks falls to a price below the Coupon Barrier, the investor will no longer receive the stated income payment.  It necessarily follows that having multiple underlying stocks in the basket of the Structured Notes is riskier than a single underlying stock because it is more likely that at least one stock, among multiple stocks, will decline in value.

 

Separate and apart from the Coupon Barrier that dictates whether the investor receives income, each Structured Notes additionally states that the stocks underlying the note are being benchmarked at a specific price, known as the “Initial Level.”  If one of the underlying stocks declines to a certain level by the maturity date, known as the “Knock-in Barrier,” not only will the investor not receive income but they will be forced to purchase shares of the depreciated underlying stock at market value.  This is problematic because the cost basis associated with those same shares is commensurate with the Initial Level.  In other words, the investor will incur massive losses on day-one because they will own shares of stock worth far less than the Initial Level value assigned in the Structured Notes term sheet.  If, on the other hand, the underlying stocks appreciate in value, investors do not get to participate in the upside and the issuer can call the note; hence the name Structured Notes.

Structured Notes and other forms of Structured Notes are speculative in nature.  They are only appropriate for investors who are willing to subject their assets to significant portfolio decline.

 

We Help Investors Recover Investment Losses

Financial advisors have a legal and regulatory obligation to recommend only suitable investments that are appropriate for their clients’ needs and objectives. Their employing brokerage firm has a legal and regulatory obligation to supervise the Financial Advisors’ sales practices and dealings with clients. To the extent any of these duties are breached, the customer may be entitled to a recovery of his or her investment losses.

 

Reasonable basis suitability requires that a recommended investment or investment strategy be suitable or appropriate for at least some investors. Reasonable basis suitability requires an advisor to conduct adequate due diligence so that he or she can determine the risks and rewards of the investment or investment strategy.

 

Quantitative suitability requires a brokerage firm or financial advisor with actual or de facto control over a customer’s account to have a reasonable basis for believing that a series of recommended transactions – even if suitable when viewed in isolation – is not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile. No single test defines excessive activity, but factors such as the turnover rate, the cost-equity ratio, and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member or associated person has violated the quantitative suitability obligation.

 

Customer-specific suitability requires that a member or associated person have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile. Among the criteria that a financial advisor must evaluate to satisfy his or her customer-specific suitability obligations include the investor’s age, tax status, time horizon, liquidity needs, and risk tolerance; a client’s other investments, financial situation and needs, investment objectives, and any other information disclosed by the customer should also be considered.

 

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 (800) 931-8452 or by email at mwolper@wolperlawfirm.com.

 

Attorney Matthew Wolper

Attorney Matthew WolperMatt Wolper is a trial lawyer who focuses exclusively on securities litigation and arbitration. Mr. Wolper has handled hundreds of securities matters nationwide before the Financial Industry Regulatory Authority (FINRA), American Arbitration Association (“AAA”), JAMS, and in state and federal court. Mr. Wolper has handled and tried cases involving complex financial products and strategies ranging from traditional stocks and bonds to options, margin and other securities-based lending products, closed/open-end mutual funds, structured products, hedge funds, and penny stocks. [Attorney Bio]