The Financial Industry Regulatory Authority has suspended a rep for six weeks, fined him $10,000 and ordered him to pay $7,530 in restitution plus interest for recommending that two retiree clients invest in 18 structured notes, violating Reg BI's Care Obligation.
Between April 2022 and July 2023, Frederick E. Hohensee of Abacus Investments in Dousman, Wisconsin, made the recommendations without a reasonable basis to believe that they were in the customers' best interests based on their investment profiles, according to FINRA's order.
FINRA investigated the matter after a customer complaint.
Both customers were retirees with low risk tolerances and short-term liquidity needs.
As FINRA explains, structured notes are retail products designed or "structured" to meet specific investment objectives, such as growth, income or risk management.
"They do so by combining a traditional security, like a bond, with a derivative component. The issuer of the structured note promises to pay a return based on a formula that incorporates the performance of one or more reference assets, in this case individual stocks and stock indices," FINRA states.
While some structured notes offer full or partial protection of the principal invested, "the notes that Hohensee sold to the two customers offered no principal protection," according to FINRA's order.
Also, while some structured notes have relatively short maturities, measured in months, others might extend for 10 or more years.
"Each of the structured notes that Hohensee sold to the two customers had a maturity of at least five years, and twelve of the eighteen notes missed at least some interest payments once the value of the reference assets declined below a specified level," FINRA's order states.
"The notes were not listed on an exchange, a characteristic often associated with a potential lack of liquidity," the order continues, and the notes' prospectuses "disclosed significant risks, including that the notes might stop paying interest if the value of the reference assets declined below a specified level and the customers might lose all or a substantial portion of their investments."
Neither customer had prior experience with complex investment products like structured notes.
"Hohensee recommended that each customer invest a substantial portion of their respective net worth in the structured notes despite their risks," FINRA said.
Hohensee earned $7,530 in commissions from the sale of the structured notes.
"Following a decline in the equity markets, the structured notes' value fell significantly, and the issuers of certain notes, including twelve of the notes at issue here, stopped paying interest," according to the order. "The issuers subsequently redeemed thirteen of the structured notes at par, but the customers still own five notes."
Abacus Investments declined comment. Hohensee accepted and consented to FINRA's findings without admitting or denying them.
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