On March, 30, 2015, H. Beck Inc. (“H. Beck”) submitted a Letter of Acceptance Waiver, and Consent (“AWC”) to settle allegations of sales practice violations by the Financial Industry Regulatory Authority (“FINRA”). FINRA alleged that: 1) H. Beck failed to establish a reasonable supervisory system and written supervisory procedures to identify and apply applicable unit investment trust (“UIT”) sales charge discounts to customers; 2) H. Beck failed to reasonably supervise its registered representatives’ use of consolidated reports; and 3) H. Beck failed to enforce its written supervisory procedures regarding its non-registered representatives’ use of outside email accounts. Without admitting or denying the facts alleged in the AWC, H. Beck submitted to censure and paid civil fines of $ 425,000 to settle the FINRA allegations. A full version of the FINRA AWC may be found here.
A UIT is a type of investment company that issues securities representing an undivided interest in a portfolio of securities. UITS are usually issued by a sponsor that assembles the portfolio of securities, deposits the securities in a trust, and then sells units through a public offering. Each UIT unit is a redeemable security that is issued for a specific term and entitles the investor to a proportionate share of the UIT’s net assets. The UIT sponsor usually offers a variety of different ways for investors to reduce the sales charges for their purchases, such as offering a discount on purchases that are funded from Redemption proceeds from another UIT.
In the AWC, FINRA noted that on March 31, 2004, FINRA reminded its members of their obligation to develop written supervisory procedures to ensure that customers receive the appropriate sales charge discounts for their UIT investments. See NTM 04-26, Unit Investment Trust Sales. FINRA’s guidance instructs its members to make sure that UIT transactions take place “on the most advantageous terms available to the customer.” Specifically, the AWC alleges that, in violation of NASD Conduct Rule 2110 and FINRA Rule 2010, from October 2008 through September 2013, H. Beck failed to give customers discounts for approximately $ 23 million of UIT investments purchase. Additionally, for its failure to implement written supervisory procedure reasonably designed to ensure that customers received sales charge discounts, FINRA alleged that H. Beck violated NASD Conduct Rules 3010(a)-(b) and 2110, as well as FINRA Rule 2010.
FINRA member firms provide their customers with consolidated reports to give their customers an accurate picture regarding their financial holdings, regardless of where those assets are held. However, consolidated reports may supplement, but no do replace NASD Conduct Rule 2340 customer account statements In April 2010, as with the UIT sales, FINRA reminded its member firms that consolidated reports, like all communications with the public, must be clear, accurate , and in no way misleading. See FINRA Regulatory Notice 10-19. The AWC alleged that from July 26, 2011 through May 13, 2012, H. Beck registered representatives distributed consolidated reports to customers that did not contain proper valuation of illiquid investments. Furthermore, H. Beck did not have adequate supervisory procedures addressing the role of supervision with respect to consolidated reports. Based on these facts, FINRA alleged that H. Beck violated NASD Conduct Rules 2110, 2210(d)(1), 3010(a)-(b), and FINRA rule 2010.
Additionally, H. Beck’s written supervisory procedures mandated that non-registered employees utilize an email account that is registered with H Beck’s archival vendor for communications with customers. From July 26, 2011 through May 12, 2012, H. Beck failed to enforce these procedures and as a result failed to retain records of customer communications in violation of NASD Conduct Rule 3010(b) and FINRA Rule 2010.
- Beck is a full-service brokerage firm that has been a FINRA member since 1954. While H. Beck maintains its principal place of business in Bethesda, Maryland, it has approximately 465 registered branch offices with approximately 800 registered persons nationwide. The instant AWC is not the first time H. Beck has been accused of failing to follow its written supervisory procedures with respect to its email retention systems. On July 14, 2011, H. Beck also entered into an AWC with FINRA whereby it agreed, without admitting or denying the findings, to censure and a fine of $ 150,000 for its failure to retain email communications with its customers.
Investors may suffer damages when FINRA member firms fail to implement or enforce adequate written supervisory procedures. However, the securities fraud attorneys at Lax & Neville represent investors in claims against their brokers regarding UIT investments. If you believe that you have suffered damages due to UIT investments, contact Lax & Neville today and schedule a consultation by calling 212-696-1999.