The Financial Industry Regulatory Authority has suspended an LPL Financial rep for four months and ordered him to pay $5,000 and to disgorge $402.58 in commissions for selling a complex product to a 95-year-old client.
According to FINRA's order, in September 2021, Brenton Ditto recommended that a 95-year-old customer invest in Government National Mortgage Association (GNMA) support class bonds, "a complex product for which Ditto did not have a reasonable basis to believe was in the customer's best interest based on his investment profile," violating Regulation Best Interest.
Ditto accepted and consented to FINRA's findings without admitting or denying them.
In September 2021, Ditto's client, who was then 95 years old, opened an account with LPL.
The client's daughter, who had power of attorney over her father's account at the time, opened a new account for her father and stated that his investment objective was "'income with capital appreciation,' the most conservative investment objective, and also stated that he had no experience with fixed income investments," according to the order.
The account was funded with $75,000, the proceeds from the sale of the 95-year-old customer's home.
"The customer's daughter told Ditto that she was seeking an investment for her father that had no principal risk but could generate returns greater than a bank CD," FINRA said, and that the principal of the investment "could not be tied up for any longer than one year because she needed the funds for her father's living expenses."
Between Sept. 8, 2021 and Sept. 14, 2021, Ditto recommended that his customer purchase four GNMA support class bonds for approximately $71,000, for which Ditto received over $400 in commissions.
"The support class bonds were part of a Real Estate Mortgage Investment Conduit (REMIC), a mortgage-backed security that pools mortgage loans," according to FINRA.
"A REMIC contains various classes, the holders of which receive a return of principal from the underlying mortgages according to a structured priority. Holders of classes with a higher priority receive a return of principal before the holders of the support class bonds that Ditto recommended," FINRA said.
Moreover, FINRA went on to explain, "if there is a shortfall in the return of principal on the mortgages underlying the higher priority classes, principal returned on the support class bonds will be paid to the holders of the higher priority classes rather than to the support class bond holders."
If interest rates rise, "it is likely that mortgage principal repayments will slow and that repayments on mortgages underlying the support classes will be directed to pay the holders of the higher priority classes. The market value of support class bonds will also decrease as interest rates rise," FINRA said.
Ditto "failed to review the prospectuses and did not take into account the risk factors associated with recommending the support class bonds, including that principal repayments for support class bonds could be directed to those classes with a higher priority, and in a rising interest rate environment support class bonds were likely to lose value," the order states.
Indeed, interest rates rose after Ditto purchased the support class bonds. His customer received no principal repayments on the GNMA support class bonds, and their value decreased.
"The customer incurred approximately $19,000 in losses from his investments, and settled his claim against LPL," FINRA said.
(LPL did not return a request for comment as of press time.)
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