Cetera Sanctioned For Failure To Supervise

Cetera Advisor Networks LLC a brokerage firm headquartered in El Segundo California has been censured and fined $700,000.00 founded on allegations that the firm neglected to supervise a registered representative who made unsuitable trades and mutual fund switches in customer accounts. Letter of Acceptance Waiver and Consent No. 2014040951702 (Dec. 19, 2018).

According to the AWC, between January of 2009 and January of 2015, the firm did not address red flags pertaining to unsuitable stock trading and mutual fund switching by MK – a Cetera Advisor Networks stockbroker. Evidently, MK bought and sold those investments on a short-term basis several hundred times in fourteen customers’ accounts. Apparently, MK would purchase one Class A mutual fund share that was meant to be held for a long period of time, only to sell it shortly after it was purchased. In the same year, MK would purchase another Class A mutual fund from a separate fund family.

The AWC stated that while the purchases and sales of mutual funds were effected by MK, he was also purchasing and selling equities to conceal that he was switching mutual funds on a short-term basis. FINRA stated that MK lacked a business purpose for engaging in those transactions, and those transactions failed to align with customers’ objectives for investing and tolerances for risk.

The AWC also noted that MK’s inappropriate trading activities led customers to pay unwarranted front-end loads every time that MK made a Class A mutual fund purchase. Evidently, when making those purchases, Cetera Advisor Networks policy mandated that he inform the customers about the fees involved. Indeed, the firm required customers to sign off on disclosure forms to evidence their consent to MK’s transactions. Yet, MK disregarded the firm’s policies.

FINRA stated that MK’s excessive switching and trading – which at one point had been flagged by MKs supervisors – allowed him to accumulate so much in revenues that he became the recipient of the firm’s 2013 and 2014 sales awards. Meanwhile, customers sustained a total of $700,000.00 in losses.

The AWC stated that the firm failed to supervise MK’s trading activities. Particularly, MK’s supervisors reportedly uncovered instances of MK effecting inappropriate trades in customer accounts. As a result, supervisors audited MK’s activities. Audit reports apparently evidenced MK’s unwarranted and unsubstantiated rationale for effecting switches of Class A mutual funds. Another audit report supposedly suggested that MK may not have appropriately documented his transactions. The AWC stated that the supervisors did nothing more than alert the firm’s home office; MK was never disciplined.

Moreover, FINRA stated that despite the firm having received the alerts from the supervisors, it did nothing to stop MK’s misconduct from continuing to occur. Evidently, the firm maintained three years of audits regarding MKs unsuitable trades in customer accounts but did not review or address the issues. Those audits reportedly contained hundreds of notifications produced by the firm’s trading review system which evidenced MK’s excessive stock trading and mutual fund switching.

The AWC also revealed that one of the supervisors who criticized MK’s sales practices intended on sending MK a letter reprimanding him for his unsuitable trading practices; however, that supervisor’s supposed boss, a sales manager, reportedly prevented the supervisor from communicating with MK. The AWC stated that the firm ultimately allowed a non-supervisor to direct what disciplinary measures the supervisors could take. The sales manager was purportedly compensated partially on the profits that the branch generated. As a result, the sales manager apparently had a financial motive behind the decision not to reprimand MK or otherwise limit his ability to generate commissions for the firm.

Furthermore, FINRA stated that the firm failed to utilize a reasonable supervision system for detecting instances of unsuitable trading and switching of mutual funds. Apparently, there was no reasonable process used by the firm to identify the concerns referenced in electronic trade reports and audits pertaining to unsuitable transactions. The AWC stated that the individuals at the firm who could have terminated or reprimanded MK had not assessed the audit reports. Additionally, the firm used supervisors who were unable to unilaterally terminate or reprimand MK. Ultimately, the supervisors who were responsible for identifying the unsuitable trading communicated the concerns to those who neglected to follow up on the supervisors’ concerns, enabling MK to persist in making unsuitable trades and switches for years. FINRA found the firm’s failure to supervise as violative of FINRA Rules 3110(a) and 2010.