CMO FINRA Arbitration Fraud, Misrepresentation, Negligent Supervision Attorney, Russell L. Forkey, Esq.

September, 2011:

Investors Capital Corp. (CRD #30613, Lynnfield, Mass) submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $200,000 and consented to undertake a comprehensive review of its policies and procedures concerning suitability of CMOs, and the firm’s Director of Compliance shall certify in writing to FINRA within 60 days that it has engaged in a review and has in place policies and procedures designed to ensure compliance with its suitability obligation pertaining to CMOs. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it failed to establish and maintain an adequate supervisory system relating to retail CMO transactions that was reasonably designed to achieve compliance with applicable securities laws and regulations. The findings stated that the firm’s CMO systems and procedures were inadequate because they did not address the increased risks associated with inverse floater and interest-only CMOs, which were sold to firm customers.  The findings also stated that the limited written procedures the firm did have only required brokers to be knowledgeable about CMOs, in general, and only required generic disclosures to clients. The findings also included that the procedures failed to provide information to brokers regarding specific risks associated with inverse floater and interest-only CMOs or advise them that such tranches were only suitable for sophisticated investors with a high risk profile.

FINRA found that the firm’s supervisory systems and procedures failed to provide guidance to supervisors in connection with the sale of inverse floater and interest-only CMOs, and failed to establish adequate supervisory measures to monitor suitability for these riskier CMOs. FINRA also found that as a result, inverse floater and interest-only CMOs were sold without an adequate suitability review, including whether the purchasing customers were sophisticated or had a high risk profile; FINRA did not find these transactions to be unsuitable. In addition, FINRA determined that the suitability determinations the firm made did not take into account FINRA’s guidance regarding the additional risks inverse floater and interest-only CMOs posed. Moreover, FINRA found that the firm’s systems and procedures failed to require its brokers to offer to customers the educational materials required under NASD Interpretative Material 2210-8, and, as a result, brokers involved in selling CMOs to retail customers were unaware of this requirement. Furthermore, FINRA found that the firm did not offer any CMO-related educational materials to its customers, including prior to the sale of a CMO. 

(FINRA Case #2007011545201)