The Financial Industry Regulatory Authority (FINRA) recently announced it censured and fined Coastal Equities, Inc. (“Coastal Equities”). FINRA alleged Coastal Equities maintained inadequate supervisory systems and written supervisory procedures to monitor recommendations of complex products such as leveraged, inverse, or inverse-leveraged exchange traded funds (“'Non-Traditional ETFs”). As a result, FINRA censured Coastal Equities and ordered it to pay $15,000 for other supervisory failures.
Coastal Equities (FINRA CRD No. 23769) has been a FINRA member since 1989. Coastal Equities is located in Wilmington, Delaware and operates a general securities business. According to FINRA, Coastal Equities employs approximately 90 registered representatives operating from 40 branch offices.
FINRA’s Department of Enforcement recently investigated Coastal Equities and determined from October 2013 to September 2014 it did not establish, maintain and enforce a reasonable supervisory system to supervise Non-Traditional ETFs. In June 2009 FINRA issued Regulatory Notice 09-31 highlighting the unique characteristics and risks of non-traditional ETFs, including tracking error and the effect of daily resets, and cautioned members that non-traditional ETFs are typically not suitable for retail investors who plan to hold the funds longer than a single trading session.
Specifically, FINRA alleged Coastal Equities permitted its registered representatives to solicit transactions in non-traditional ETFs, though the Firm did not follow its written procedures relating to suitability and supervision of non-traditional ETFs. Coastal Equities also failed to conduct adequate due diligence on Non-Traditional ETFs and failed to adequately train its registered representatives on the unique risks associated with these products. Moreover, Coastal Equities allegedly sold these non-traditional investments to retail customers for periods that exceeded one trading session.
FINRA alleged Coastal Equities engaged in multiple violations of federal securities laws and industry rules and regulations, including but not limited to NASD Rules 2110 and 3010(b). Specifically, under NASD Rule 3010, a brokerage firm owes a duty to all of its clients to monitor and supervise its employees properly. The rule states: “[e]ach member shall establish and maintain a system to supervise the activities of each registered representative…that is reasonably designed to achieve compliance with applicable securities laws and regulations…”
If a FINRA-member fails to supervise its employees or conduct proper due diligence on investment products, then the firm may be liable to the customer for damages or disciplined by FINRA, or both. Here, FINRA censured Coastal Equities and ordered it to pay $15,000 for other supervisory failures.
Lufrano Law, LLC is a national investment litigation firm and has experience representing investors who have investment disputes with brokers and broker-dealers. Please contact us at (800) 627-2179 for more information if you have been the victim of investment negligence or fraud.