FINRA Sanctions Independent Financial Group for Broker’s Unsuitable Recommendations
On April 8, 2021, San Diego-headquartered brokerage firm Independent Financial Group, LLC (IFG), entered into a Letter of Acceptance, Waiver, and Consent (AWC) with FINRA Enforcement. The matter concerned IFG’s purported failure to properly supervise one of its registered representatives who allegedly “made unsuitable recommendations to customers” including investment recommendations in certain non-conventional investments (NCIs), such as non-traded real estate investment trusts (REITs). Without admitting or denying any wrongdoing, IFG consented to the imposition of a censure, a $200,000 fine, as well as agreeing to implement certain reasonably designed procedures aimed at achieving compliance with suitability requirements for alternative investments.
According to FINRA’s factual findings, the unnamed IFG broker—from January 2008 until March 2016—“solicited dozens of customers who were retiring or had retired to liquidate their 401(k) and pension plans and invest the proceeds with him at IFG.” Subsequently, as alleged by FINRA Enforcement, the IFG broker then “recommended that many of these customers concentrate their retirement assets in non-traded REITs and structured notes.” In many instances, the customers had little or no investment experience and had never before purchased an alternative investment.
In one instance, the IFG broker allegedly solicited a 71 year-old customer into investing 50% of his liquid net worth into certain non-traded REITs and structured notes. The senior investor’s first purchase was a $141,000 investment in a single non-traded REIT, despite the fact that the investor was retired, had a conservative risk tolerance and an investment objective of growth, and moreover, new account documents which did not permit speculation.
In yet another example cited by FINRA Enforcement, the IFG broker recommended that a 72 year-old customer, with a moderate risk tolerance, allocate 75% of their liquid net worth to non-traded REITs and structured notes. According to FINRA, despite the fact that the IFG broker recommended these investments, the broker “falsely marked the transactions as unsolicited.” Further, around the time that these recommendations were made, the IFG broker was on heightened supervision, yet no supervisor pre-approved the transactions at issue.
Pursuant to FINRA Rule 3110 (Supervision), brokerage firms like IFG are required to establish and maintain a system to supervise the activities of its associated persons that is reasonably designed to achieve compliance with applicable securities laws and regulations. Among other requirements under Rule 3110, a brokerage firm is obligated to reasonably investigate “red flags” of potential misconduct. Such red flags might include potentially altered new account documents or forms detailing investment transactions, as well as ineligible accounts purchasing alternative investments. In instances where a brokerage firm fails to adequately supervise its registered representative, a customer who has suffered losses may well purse a claim against the brokerage firm for any failure to supervise.
If you have invested in any non-traded financial products on the recommendation of your financial advisor, and have suffered losses or are unable to exit your illiquid investment position, you may be able to recover your losses in securities arbitration before FINRA. The attorneys at Giarrusso Law Group LLC have significant experience working with investors in complex and illiquid non-conventional investments, including non-traded REITs, business development companies (BDCs), and other esoteric and illiquid financial products. Investors who wish to discuss a possible claim may contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a complimentary and confidential consultation.