The Financial Industry Regulatory Authority censured NYLife Securities over its failure to enforce its written procedures for supervising what FINRA said were “higher-risk” mutual fund sales from September 2014 to December 2016 that were “subject to significant volatility.”
NYLife Securities submitted a letter of acceptance, waiver and consent to FINRA Nov. 7 in which it agreed to be censured, fined $250,000 and pay restitution to customers for their losses. The firm agreed to the letter without admitting or denying the findings. FINRA accepted the letter Wednesday.
According to the firm’s written procedures, when such fund sales resulted in customer portfolios that were overconcentrated in higher-risk securities, its registered brokers were required to work with customers to reallocate the portfolios or figure out a way to change their risk tolerances and investment objectives to correspond with their assumption of additional risk, FINRA noted.
However, the firm instead “adjusted customers’ risk tolerances and investment objectives to accommodate sales of higher-risk mutual funds, without first seeking the customers’ input,” according to the letter.
Those adjustments led to losses totaling $1.4 million, the letter said. By virtue of its failure to enforce its written supervisory procedures, the firm violated NASD Rule 3010(b) and FINRA Rule 3110(b), and consequently FINRA Rule 2010, according to the letter.
The firm’s failure to enforce its written procedures “facilitated a registered representative’s soliciting unsuitable investments to approximately four dozen customers in a trio of nondiversified mutual funds that focused on the exploration, production, storage, transportation, processing, and use of energy and natural resources,” according to the letter.
At least six of its customers with relatively conservative risk tolerances and investment objectives invested 35% or more of their liquid net worth in those higher-risk mutual funds, while two of those customers invested more than 80% of their liquid net worth in those funds, according to FINRA.
After a significant decline in oil prices, the mutual funds’ values “plummeted by up to 75% shortly after” the firm permitted the sales, causing the customers to lose more than $1.4 million, FINRA noted.
Twenty-one of the customers complained and, prior to any regulator’s intervention, the firm voluntarily paid full restitution to those customers totaling $1.1 million, according to the letter.
Following the customer complaints and FINRA’s investigation, the firm also voluntarily made improvements to its operations, including hiring three new registered principals and a fourth registered person to investigate surveillance alerts pertaining to the concentration of customer holdings in higher-risk mutual funds, FINRA said.
The firm was ordered to pay restitution to some of the customers for realized losses totaling $76,600, plus interest, and was also ordered to pay other customers for unrealized losses totaling about $250,000 plus interest, according to the letter.
NYLife Securities and its attorney, Timothy Burke of Morgan, Lewis & Bockius in Boston, didn’t immediately respond to a request for comment.