- within Intellectual Property, International Law, Litigation and Mediation & Arbitration topic(s)
A registered representative settled charges for suitability rule violations.
FINRA alleged that the representative advised clients to purchase "steepeners" - financial instruments that typically pay interest at an above-market rate at the beginning of the term and eventually transition to a floating interest rate that is less than the term rate. FINRA previously cautioned against recommending steepeners on the basis that they are "too difficult to understand" for clients, have potential for extended periods of time with little to no interest, and generally do not have a liquid secondary market.
FINRA found that the representative recommended that the client purchase the steepeners without fully understanding the risks, including the potential for no interest to be paid if the yield curve flattens. FINRA found that the representative violated FINRA Rule 2111 ("Suitability"), which requires 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 [adviser] or associated person" and, as a result, FINRA Rule Rule 2010 ("Standards of Commercial Honor and Principles of Trade").
Although the individual is no longer affiliated with a FINRA-registered member firm, he is still being held accountable under FINRA rules. As a result of these enforcement actions, the individual was (i) suspended from associating with any FINRA member in any capacity for four months and (ii) ordered to pay a $5,000 fine. The effective date of these sanctions has yet to be determined by FINRA.
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