The Financial Industry Regulatory Authority has fined Kingswood Capital Partners, a small broker-dealer in San Diego, $150,000 for failing to reasonably supervise a former registered representative’s recommendations of illiquid alternative investments to three senior customers.
According to FINRA's order, from March 2019 through June 2019, Kingswood failed to supervise the rep's sale of L bonds, a high-risk investment created by GWG Holdings, a now-defunct financial services company. The BD also failed to establish and maintain written procedures reasonably designed to achieve compliance with suitability requirements related to the L bond sales.
Kingswood violated FINRA Rules 3110 and 2010.
"Kingswood’s written supervisory procedures (WSPs) in effect during this period required supervisors to review proposed transactions for suitability," FINRA's order states. "However, Kingswood’s WSPs were not reasonably designed with respect to the supervision of illiquid products. The firm’s WSPs did not describe what factors supervisors should consider in order to assess concentration in such products, how that determination should be made, or provide any direction as to what would constitute a potentially overconcentrated position. Nor did the WSPs describe what steps should be taken if a supervisor found a potentially overconcentrated position, or how that review should be documented."
Kingswood failed to reasonably supervise a rep’s recommendations of alternative investments to three senior customers where the sales were not suitable given the customers’ investment profiles, the order states.
For instance, in March 2019, the rep recommended that an 81-year-old customer invest $96,000 in GWG L Bonds.
"Kingswood approved the sale notwithstanding the presence of red flags in the application documents suggesting that the sale was unsuitable," the order states. Besides being 81, the new customer "had a moderate risk tolerance, an investment objective of balanced growth, an annual income of less than $50,000, and a net worth, not including primary residence, of less than $100,000."
Kingswood nevertheless approved the sale, which resulted in the customer "having at least 96% of her net worth, not including her primary residence, concentrated in L Bonds," the order states.
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