BD Will Pay $6.3 Million for Failing to Monitor Client Concentrations Following Market Events 

A large broker-dealer agreed to pay $6.3 Million in fines and disgorgement for failing to implement supervisory policies and procedures that would assess suitability after significant market events.  FINRA alleges the firm significantly reduced its inventory of certain Puerto Rican municipal securities following market events including credit downgrades. However, the firm failed to reduce customer inventories, including closed-end funds managed by the respondent, and failed to change the bonds’ suitability risk classification.  FINRA also charges the firm with failing to supervise employee trading of the bonds.

OUR TAKE: FINRA interprets suitability as an ongoing obligation to monitor customer positions.  In this case, the firm compounded the issue by reducing its own inventory without addressing client positions.  FINRA essentially applies a fiduciary standard to brokers where the firm cannot benefit to a greater extent than its clients.