The Financial Industry Regulatory Authority (FINRA) recently filed a complaint against former Wells Fargo financial advisor Richard S. Hughes (Hughes). The underlying basis of the complaint alleged Hughes’ recommended unsuitable short-term unit investment trusts (UITs) to one of his senior customers in an effort to earn high commissions. Layton settled the complaint with FINRA and accepted a eight (8) month suspension and $10,000 fine.
Hughes (FINRA CRD No. 1537720) has been a member of FINRA since 1986. From October 2011 to October 2016, Hughes worked for Wells Fargo Advisors Financial Network, LLC (“Wells Fargo”). Thereafter, Hughes worked for Summit Brokerage Services, Inc. until his resignation in June 2018. FINRA’s Department of Enforcement brought a complaint against Hughes for the following alleged misconduct.
FINRA alleged between April 2015 and May 2016, Hughes recommended unsuitable UIT investments to a 72 year-old investor. A UIT is a type of investment that issues securities in the form of units in a one-time public offering, which represents undivided interests in a fixed portfolio of securities. UITs have a specific maturity date and typically carry significant upfront charges. Generally, UIT investments are considered long-term investments and short-term recommendations may be considered unsuitable.
Specifically, Hughes recommended the customer invest $545,000 in a UIT in April 2015. Only three months later, Hughes recommended the customer liquidate the UIT at a loss and reinvest the proceeds in three Class A-share mutual funds. Then within another ten months, Hughes recommended the customer sell the Class A-share mutual funds and invest in another UIT. Across all three of these transactions, Hughes earned substantial commissions, while exposing the customer to significant investment losses.
To make matters worse, once Wells Fargo’s supervisory systems recognized the blatant unsuitable transactions, it began an investigation. During this time period, Hughes provided the victim a script to dictate how the customer would respond to investigators. The customer refused and told Wells Fargo the truth about Hughes’ unethical behavior.
Based upon the foregoing misconduct, FINRA alleges Hughes violated FINRA Rules 2111 and 2010. FINRA Rule 2111, for example, requires financial advisors to recommend suitable investments and investment strategies to their clients (known as the suitability rule) based upon the client’s unique financial situation, including investment objectives and risk tolerance. A financial advisor also must have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer.