On January 3, 2020, FINRA released an AWC for Robert James D’Andria, Case No. 2017056579502. At first blush the AWC seems rather plain vanilla. The FA recommended high-risk products, in this case leveraged and inverse exchange-traded notes and funds, to retail investors and FINRA deemed those recommendations to be unsuitable. FINRA suspended the FA for 2 months and fined him $5,000.
In a typical suitability case, FINRA would claim that the account was over-concentrated in a given sector, or the position was too large relative to the portfolio as a whole, or the account was over-traded, or the investment was inconsistent with the investor’s stated investment objectives. And, in a typical case, FINRA would claim that the customer suffered meaningful losses.
In this AWC, however, FINRA does not claim that the investments were inconsistent with the customers’ investment objectives. Nor does FINRA claim that the investors were unsophisticated or otherwise lacked the ability to assess the merits of these investments. So, this begs the question: where’s the violation?
FINRA tips their hand by stating: “a representative may violate the suitability if he or she has no reasonable basis to make the recommendation to any customer, regardless of the investor’s wealth, willingness to bear risk, age, or other individual characteristics.”
Ok, so FINRA believes this guy didn’t have a “reasonable basis” for recommending the products he sold. And why is that? Well, here’s where things get interesting.
FINRA Rule 2111 has a reasonable-basis suitability obligation which requires, among other things, “associates person’s familiarity with the security or investment strategy.” Ah, so here’s where FINRA dinged the FA. They claimed he failed to do his homework before recommending the product. According to FINRA, the FA failed “to understand the unique features and specific risks associated with these products before offering them to his customers.”
So, what’s the takeaway lesson here: you better understand the product you are recommending and be able to explain the rationale for your recommendations to your firm and your regulator. Because if you can’t explain why you did what you did, an otherwise suitable recommendation can morph into an unsuitable recommendation in the land of FINRA.
The sanction assessed against the FA in this case was essentially middle-of-the-road for a suitability violation. For a Rule 2111 violation, FINRA’s Sanction Guidelines call for a fine of between $2,500 and $116,000 and a suspension of 10 days to 2 years. Given that FINRA suspended D’Andria for 2 months, the Enforcement attorneys must have concluded that some aggravating factors existed.
Herskovits PLLC has a nationwide practice representing individuals and firm facing a FINRA inquiry or disciplinary action. For a consultation, feel free to call us at 212-897-5410.