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Branch Manager and FINRA Fail to See Red Flags of Unsuitability Involving Senior Customers
June 6, 2023
In a recent FINRA regulatory settlement, a former supervisor was charged with having been aware of red flags of potentially unsuitable sales of liquid limited partnerships to senior customers. Indeed, those red flags were waving in 2015, 2016, 2017, 2018, and 2019. Given all the years during which all those red pennants were wavin', I understand why an in-house supervisor would be called to task for not supervising. On the other hand, why isn't Wall Street's self-regulatory-organization also called to task when its examination staff didn't take note of those same warning signs for some five years? You got failure to supervise. You got failure to regulate.
Case in Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Rande Aaronson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.
In the Matter of Rande Aaronson, Respondent (FINRA AWC 2019063686204)
https://www.finra.org/sites/default/files/fda_documents/2019063686204
%20Rande%20Aaronson%20CRD%201758915%20AWC%20vr.pdf
https://www.finra.org/sites/default/files/fda_documents/2019063686204
%20Rande%20Aaronson%20CRD%201758915%20AWC%20vr.pdf
The AWC asserts that Rande Aaronson was first registered in 1987, and by 1984 was registered with David Lerner Associates, Inc. ("DLA"). As alleged in part in the "Overview" portion of the AWC:
E11 and E12 are illiquid limited partnerships that registered representatives at DLA sold to their customers. Each limited partnership was formed to acquire and develop oil and gas properties. Additionally, the partnerships’ objectives included making distributions to investors and, five-to-seven-years after the termination of the offering, engaging in a liquidity event. Each limited partnership’s ability to make return of capital distributions to its partners and to engage in a liquidity event was substantially dependent on the performance of the oil and gas properties in which the partnerships invested. According to the E11 and E12 prospectuses, investments in the partnerships involve a “high degree of risk,” and these limited partnership interests were appropriate only for investors willing and able to assume the risk of a “speculative, illiquid, and long-term investment.”
. . .
When Aaronson reviewed a specific E11 or E12 transaction, his practice was to check that the related customer Suitability Profile was signed and that the customer had signed the Subscription Agreement and Acknowledgement of Risk form. He also compared the sale to DLA’s sales parameters for E11 and E12. Yet Aaronson did not conduct a reasonable analysis of the suitability of E11 and E12 transactions for certain customers, even when he reviewed sales to senior customers and/or within 30 days of a risk tolerance increase.
Aaronson was aware of, but failed to reasonably investigate and respond to, red flags of potentially unsuitable sales of E11 and E12 to certain senior customers.
Aaronson was also aware of changes to customer risk tolerances around the time of sales of E11 and E12. Importantly, an increase in risk tolerance could be necessary for a customer to purchase E11 or E12 under DLA’s sales parameters or necessary to enable the customer to purchase an increased amount of E11 or E12. Nevertheless, he did not reasonably investigate certain customer risk tolerance increases as a red flag that required additional scrutiny.
By failing to reasonably supervise sales of E11 and E12, Aaronson violated FINRA Rules 3110 and 2010.
Sanctions
In accordance with the terms of the AWC, FINRA imposed upon Aaronson a $5,000 fine and a one-month suspension from associating with any FINRA member in Principal-only capacities.
Bill Singer's Comment
Yet another example of what I call "garbage regulation." It is 2023, but FINRA is only now getting around to sanctioning supervisory misconduct from 2015 through 2019 -- as in four to eight years ago. Note that the AWC states that "Aaronson is no longer registered or associated with a FINRA member firm . . ." Nothing like suspending an unregistered/unassociated person. Making matters worse, FINRA sure as hell took its time with this investigation and settlement.
Assuming that FINRA conducted an on-site examination of DLA at least once every four years, that means the self-regulatory-organization detected no supervisory lapses by Aaronson during at least one on-site exam sometime during 2015, 2016, 2017, 2018, and 2019. Since FINRA's AWC starts with a "2019" handle, that means the investigation of Aaronson was initiated four years ago. What took FINRA four years to investigate and settle?
In part, the AWC alleges that "Aaronson was aware of, but failed to reasonably investigate and respond to, red flags of potentially unsuitable sales of E11 and E12 to certain senior customers." If the customers were senior citizens in 2015, 2016, 2017, 2018, and 2019, then they had that status when FINRA's examination staff was on the member's premises for at least one review (assuming no more than a four-year cycle). How come FINRA staff didn't connect the "red flags" in a more contemporaneous fashion? Assuming that Aaronson had committed supervisory lapses going back to 2015, it would seem that FINRA committed its own regulatory lapses in failing to "reasonably investigate and respond to" the indicia of unsuitability involving senior investors.
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