Cadaret, Grant & Co fined for Supervisory Failures

Cadaret, Grant & Co., Inc., a FINRA member headquartered in Syracuse, NY, offers brokerage services to customers via roughly 935 registered reps throughout over 500 branch offices, and provides a majority of its reps the opportunity to offer insurance to investors not provided via the brokerage firm. The firm was censured and fined $75,000 by FINRA after consenting to FINRA’s findings that the firm failed to establish and maintain a supervisory system adequately designed to monitor and supervise certain variable annuity (“VA”) surrenders, while also not having a system in place to maintain books/records reflecting the variable annuity surrenders. FINRA Letter of Acceptance, Waiver and Consent No. 2014039684601 (May 28, 2015).

According to the Acceptance, Waiver and Consent

FINRA alleged that from January of 2011 through December of 2014, Cadaret, Grant & Co had no policies pertaining to reviewing and approving the surrender (sale) of variable annuity contracts recommended by the firm’s sales force if it was not for an exchange/replacement done by going through the firm. The AWC indicates that the reps bypassed the firm and had surrender transactions go straight to the insurance company.

According to the AWC, during the relevant period, the firm’s reps processed in excess of 500 surrender transactions, valued at a total of roughly $27M, where the surrenders caused $1.5M in total surrender fees to be charged to customers. The AWC notes that these types of transactions were not reviewed by any firm principal for suitability or other sales concerns. FINRA noted that the firm did not even make or maintain records pertaining to the majority of such surrenders.

The AWC further stated that the Cadaret, Grant & Co’s failure to establish procedures described above led to customer harm. An example was noted in the AWC where in 2011, an elderly customer acted upon one of the firm’s reps, called BM, where the customer sold annuities prematurely in order to purchase charitable gift annuities via another firm BM was associated with called 54F. Meanwhile, BM had allegedly not disclosed such relationship to Cadaret, caused the customer over $36,000 in surrender fees, and earned $59,000 if commissions via the elderly person’s subsequent purchase of the charitable gift annuity (unbeknownst to the customer). The AWC noted that BM’s recommendation to the customer was unsuitable given the failure of BM to perform proper due diligence on the 54F firm, the annuity itself, the customer’s age, financial condition, investment objectives, amount of her net worth the transaction represented, surrender fees incurred, and tax consequences.

FINRA has taken an increasingly more direct stance on suitability rules for variable annuity surrender transactions. FINRA’s position is that such rule applies to any recommendation to sell the annuity regardless of use of proceeds, including where a firm wishes to recommend proceeds to be purchasing equity-indexed annuities. The AWC noted that Cadaret violated FINRA Rule 3110 and NASD Rule 3010 for not establishing a system to maintain and supervise the surrenders described above. The firm was alleged not to have even been aware when surrenders were taking place, let alone ensuring suitability of such surrenders. The AWC noted the firm violated NASD Rule 4511 and NASD Rule 3110(a) for not maintaining accurate records and books regarding surrenders as required by the Securities Exchange Act of 1934.

Prior Disciplinary Actians Against Cadaret, Grant & Co

This is not the first time that Cadaret has been faced with disciplinary action for misconduct. In December of 2011, Cadaret was censured and fined $200,000 by FINRA, as well as being ordered to provide certain customers with rescission options for their annuities, and ordered to certify it had taken a comprehensive review of policies/procedures regarding suitability of VAs. According to the AWC, from May of 2006 to September 2008, the Firm had recommended 19 variable annuity transactions which were not suitable, failed to supervise their registered rep’s transactions, and additionally failed to establish adequate supervisory systems in violation of NASD Rules 2310, 2821, 3010, and 2110.

Guiliano Law Group

If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.