The GMS Group, LLC (CRD #8000, Livingston, New Jersey) and Carmine Claudio Capone (CRD #1124455, Fort Lauderdale, Florida) submitted an Acceptance, Waiver and Consent (AWC) in which the firm was censured and fined $75,000. Capone was fined $10,000 and suspended from association with any FINRA member in any principal capacity for 30 business days.
Without admitting or denying the findings, the firm and Capone consented to the sanctions and to the entry of findings that the firm, acting through Capone, failed to adequately supervise the sales practices of a registered representative who recommended and engaged in unsuitable trading in nontraditional exchange-traded funds (ETFs) in four customers’ accounts, and exercised discretion without having obtained prior written authorization in customers’ accounts.
The findings stated that the firm assigned Capone to supervise the representative’s activities as a registered representative acting on the firm’s behalf. The firm failed to establish and maintain a supervisory system designed to achieve compliance with applicable NASD® and/or FINRA rules in connection with the sale of nontraditional ETFs. The firm allowed the representative to recommend and sell nontraditional ETFs, but did not adopt any supervisory controls to properly supervise those transactions.
In addition, the firm did not provide any training to the representative regarding nontraditional ETFs. The firm and Capone allowed the representative to execute purchases of non-traditional ETFs, even though the representative did not have a reasonable basis to recommend the securities and they were unsuitable from a customer specific perspective. The findings also stated that the firm and Capone were on notice of numerous “red flags” that the representative had a propensity to engage in unsuitable trading on behalf of his customers.
Despite the red flags, the firm, acting through Capone, failed to take adequate steps to supervise the representative’s sales activities. Capone only contacted one of the customers at issue, a retired and unsophisticated elderly investor with a moderate risk tolerance. During this conversation, Capone did not ascertain whether the representative Disciplinary and Other FINRA Actions 3 December 2015 was exercising discretion in the customer’s account, did not discuss the amount of commissions being generated, and did not communicate the unique and substantial risks associated with trading nontraditional ETFs.
Capone never spoke with the other customers about the activity in their accounts, including a retired and unsophisticated 70-year-old investor who endured more than $92,000 in realized losses. The findings also included that the firm, acting through Capone, did not take any steps, other than speaking with the representative, to ascertain whether he was exercising discretion without written authorization in any of the accounts at issue.
FINRA found that the firm and Capone failed to enforce the firm’s written supervisory procedures (WSPs), including ensuring that customers’ investment objectives and risk tolerance were consistent with the transactions in their accounts and were updated when there was a change in status, including “ETFs in training and adequate supervisory reviews for transactions in nontraditional ETFs,” and reviewing for suitability for transactions in nontraditional ETFs.
The suspension is in effect from November 16, 2015, through December 29, 2015. (FINRA Case #2013038756502) December 2015