The Investment Center, headquartered in Bedminster, New Jersey, was reprimanded and fined $50,000.00 by Texas State Securities Board pursuant to a Consent Order containing findings that the firm failed to supervise a registered representative’s activities, which consisted of making unsuitable investment recommendations to customers. In the Matter of The Dealer Registration of The Investment Center, Inc., Order No. IC-16-CAF-13 (July 29, 2016).
According to the Order, from January of 2010 to March of 2014, one of the firm’s stockbrokers made energy sector securities recommendations to customers that should have raised the firm’s suspicions concerning the suitability of the transactions based on the customers’ financial circumstances and objectives for investing. Apparently, transactions had been effected in customer accounts pursuant to the stockbroker’s recommendations, resulting in their accounts having been overconcentrated in low priced energy sector securities.
The Order revealed that some of the customers’ accounts were exposed to greater risks based upon customers’ securities holdings having been comprised of just one issuer. Evidently, a substantial number of the customers’ accounts had been comprised of ninety-five percent equity positions, in which one-hundred percent of the equity positions were energy sector securities. Yet, several customers who were the subject of the stockbroker’s recommendations communicated objectives of investing with a conservative to moderate level of risk.
The Order revealed that red flags pertaining to the stockbroker’s conduct were known to the firm via exception reports that warned the firm about customer’s concentrated energy sector positions as well as customers’ accounts having suffered losses. Apparently, the firm failed to communicate with customers to ascertain whether the trading in their accounts was consistent with customers’ tolerance for risk and objectives for investing which had been detailed within their new account documentation. Further, the firm reportedly failed to determine whether the stockbroker had attempted to retrieve permission from customers prior to effecting transactions in their accounts. These failures on the firm’s part were reportedly violative of the firm’s own procedures, as the procedures required that the firm investigate activities which may be out of compliance or even indicative of fraud.
The Texas State Securities Board found that no adequate investigation was pursued by the firm in response to the red flags pertaining to the stockbroker’s conduct. Even though the firm reached out to customers to request that the customers confirm in writing with the firm that they agreed with the stockbroker’s recommendations and were cognizant of losses in their account, the firm apparently failed to reach out to customers who were unresponsive to the firm’s letters. At least one customer filed an investment related dispute concerning the stockbroker’s conduct, which was settled for $98,000.00 in damages. Ultimately, the firm’s conduct was found to be violative of Texas State Securities Board Rules and Regulations §115.10(b)(1).
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