Broker-dealer and investment advisor Royal Securities has agreed to pay $175,000 in fines to FINRA for supervisory and suitability failings, including the improper sale of non-traditional ETFs and niche bonds.
Royal lacked adequate supervision and controls in several key areas of its regulatory responsibilities, the industry body wrote in a letter of acceptance, waiver and consent.
Grandville, Mich.-based Royal also agreed to a censure and multiple sanctions for failing to adequately supervise two of its registered representatives and for making improper commission payments to an outside entity. The firm further committed to pay $12,742 in restitution to its clients.
As part of the agreement, the firm, which has 41 registered representatives, admitted no guilt.
Royal executives did not respond to requests for comment. FINRA spokesman George Smaragdis also declined to comment.
NEW LINE OF BUSINESS
In May 2009, Royal began underwriting bonds for three churches, according to FINRA, and until October 2011 sold $4.3 million of those bonds to its customers.
In addition, Royal acted as the lead placement agent for another broker-dealer selling secured certificates of participation into a fund that raised capital for Christian churches. Between December 2009 and September 2011, Royal recorded 151 sales into this fund, worth a total of $2.9 million.
Despite having entered into the church bond and fund business, Royal failed to adopt reasonable [written supervisory procedures] and supervisory controls to govern this new line of business, FINRA found.
Those supervisory procedures that Royal did adopt were insufficient in that they largely addressed administrative procedures to approve a new issue. They did not address specific suitability considerations, particular supervision issues or any required due diligence of church bonds underwritten by the church, the regulator continued.
In conducting due diligence on the church bonds Royal relied exclusively on documentation and information provided by the churches themselves, FINRA wrote, adding that Royal also failed to effectively investigate the fund.
FINRA further found that the firms sales of both the church bonds and fund certificates were not suitable for its clients.
NONTRADITIONAL ETF PROBLEMS
Between January 2010 and May 2012, Royal also engaged in 245 purchases and sales of nontraditional ETFs, for a total of $4.75 million in principal traded, according to FINRA.
Nontraditional ETFs, which employ swaps, futures contracts and other derivative instruments to achieve their ends, are designed to be held in the short term, FINRA noted. Yet many of the holding periods for Royal clients were in excess of six months and up to two years, the regulator wrote.
The firms registered representative in charge of Royals non-traditional ETF strategy displayed a lack of understanding of chief characteristics of these investment vehicles and FINRAs rules governing their use, the regulator said. The representative further did not ensure that other representatives who sold them to Royal clients received training in their proper use, according to FINRA.
As part of its agreement with the regulator, Royal agreed to hire an independent consultant not unacceptable to FINRA staff within 90 days to conduct a thorough review of its policies, systems, procedures and training related to multiple areas of operation. The firm also agreed to report back to FINRA regarding implementation of prescribed changes.
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