The Financial Industry Regulatory Authority says a broker-dealer will pay $3.4 million to a tribe of Native Americans for excess sales charges on $190 million purchases of nontraded real estate investment trusts (REITs) and business development companies (BDCs).
FINRA also fined the broker-dealer, Albany, New York-based Purshe Kaplan Sterling (PKS) Investments, $750,000 for its failures to supervise sales of these securities.
While the settlement resolves charges brought in a February 2016 FINRA complaint against PKS, it does not resolve charges facing the tribe’s former registered representative, Gopi Vungarala. Vungarala served as both the tribe’s advisor and its treasury investment manager from 2011 to 2015 out of an office in Midland, Michigan.
“PKS failed to adequately review the risks inherent in that relationship or establish procedures designed to mitigate the risks,” FINRA said in a statement.
Due to the supervisory failures, Vungarala misled the tribe by telling its members “that neither PKS nor he would receive commissions on its purchases,” the regulatory group says. “In fact, Vungarala personally received at least $9 million in commissions from the tribe’s investments.”
Furthermore, PKS “failed to identify that more than 200 of the tribe’s purchases were eligible for discounts based on the volume of the purchases,” according to FINRA. Vungarala’s commissions would have been about $6 million if the tribe had received such volume discounts.
In addition, from 2009 to 2014, PKS did not maintain and enforce “an adequate supervisory system and written supervisory procedures to ensure compliance with the securities laws and FINRA rules when it sold nontraded REITs and BDCs,” it said.
For instance, PKS did not have procedures to identify accounts eligible for volume discounts and did not inform representatives or supervisors in order to ensure that discounts were applied appropriately.
History of Issues
According to FINRA BrokerCheck records, PKS had more than 1,230 registered reps in 2015-2016.
It has had six regulatory actions taken against it and resolved two disputes via arbitration. In 2016, for instance, PKS agreed to pay $200,000 over allegations that it did not have due diligence procedures in place to track advisors’ outside business activities — such as Vungarala’s conflicting dual role for the tribe (though this fact was not mentioned in the ruling).
Five years earlier, the broker-dealer agreed to pay $100,000 over charges related to the supervision and suitability of variable annuity sales.
In 2006, it agreed to pay a settlement of nearly $300,000 related to negligence and misrepresentation, as well as to the breach of both fiduciary duty and contract; this came two years after it paid $50,000 over issues related to failures in its supervision and handling of mutual fund transactions and switches.
In February 2016, Vungarala resigned “in order to dedicate his time and efforts in defending these allegations,” his BrokerCheck records state.
“Purshe Kaplan Sterling Investments is pleased that the firm has reached a settlement with FINRA that brings its involvement with this matter to a close,” said CEO J. Peter Purcell, in a statement.
“We take regulatory compliance very seriously, and these allegations, even against only one of our representatives, requires us to pause and assess what we can do better. To that end, the firm has taken the appropriate steps to ensure that customer eligibility for volume discounts is a priority and will continue efforts to identify and remedy any other potential gaps in its supervisory systems and controls,” Purcell added.
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