Triad Sanctioned by FINRA for Violating Member Firm Rules on Supervising Financial Advisors
Because of the high degree of financial responsibility placed on investment advisors, the Financial Industry Regulatory Authority (FINRA) has regulations in place that govern not only the work of investment advisors but the companies that employ them. These rules require a brokerage to adequately supervise the work of their teams when it comes to handling customer accounts and filing disclosure statements and notification forms. When an investment advisor fails in their duties to clients, not only is the financial advisor subject to sanctions but the employing brokerage is, too. This is what happened recently with Triad.
Triad was sanctioned by FINRA, effective February 9, 2021, for failure to supervise. Like other member firms registered with FINRA, Triad agrees to follow professional standards as set forth by FINRA. But after an investigation, FINRA determined that Triad failed on three separate occasions and penalized the member firm with a censure, fine, and financial restitution. According to publicly available FINRA documents:
● From June 2015 through July 2017, the company failed to set up and adhere to effective supervisory practices to ensure suitability requirements were met regarding switching and short-term trades of Class A share mutual funds.
● From June 2015 through December 2017, the company failed to set up and adhere to effective supervisory practices and written supervisory procedures to address inappropriate activities related to variable annuities.
● From June 2015 through December 2017, the company neglected to file certain financial disclosures related to customer-initiated complaints and also failed to file updated reports that disclosed reportable events as part of its registered representatives Uniform Application for Securities Industry Regulation or Transfer Form (Form U4). It also failed to file the Uniform Termination Notice for Securities Industry Registration Form (Form U5) as required when separating an employee from service and also used to report recordable events.
As described in the FINRA sanction, “FINRA Rule 2111 states that a member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
In other words, every customer’s situation is unique and the customer’s needs are expected to be paramount in any recommendation made by the investment advisor, every single time. If frequent or high-risk trades, for example, offer financial benefits to the financial advisor through increased commissions but do not support the client’s overall investment goals, the advisor is barred from engaging in these activities for that customer.
The FINRA sanction against Triad continues, “FINRA Rule 3110 requires each FINRA member firm to establish, maintain, and enforce a supervisory system, including written procedures, to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.”
Triad received four customer complaints during the period investigated, according to the FINRA sanction, and they all focused on the work of one investment advisor. The complaints had a common theme—that the broker borrowed from clients outside the approved activities of the firm, a violation of company and regulatory policy. The company settled the customer complaints but delayed filling the appropriate disclosure notification paperwork with FINRA for hundreds of days.
For a brokerage, and by extension, the securities industry, to have the trust of customers, customers must have trust in brokers and their investment advisors. And holding brokerage firms responsible for the conduct of their members can be an effective way to ensure that investment advisors cannot stray from best practices and industry regulations without serious consequences. Supervision is an effective way of ensuring investment advisors follow standards; without supervision, brokers may give in to temptation with practices like selling away. When brokerages provide adequate supervision of their investment advisors, it offers peace of mind to customers and encourages them to invest with confidence so they can meet their financial goals for wealth creation and preservation.
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 firstname.lastname@example.org.