The Financial Industry Regulatory Authority Inc. wrapped up 2021 with settlements and penalties against two sizable broker-dealers that work with independent-contractor financial advisers.
On Dec. 22, Finra penalized Emerson Equity $1.7 million for years of poor supervision of short-term mutual fund trades. A week later, it hit an Advisor Group broker-dealer, Triad Advisors, with $705,000 in penalties, also for poor supervision of sales of the LJM Preservation & Growth Fund, a alternative mutual fund that closed in 2018.
With more than 200 registered reps and financial advisers in 50 offices, Emerson Equity primarily sells private placements, according to Finra.
But Emerson ran into problems from 2015 to 2020 when the firm and its CEO and founder, Dominic Baldini, failed to put into place a variety of systems to monitor short-terms trades of mutual fund Class A and Class B shares. Such systems would have enabled the firm to comply with Finra’s suitability rule.
Mutual fund share classes charge different prices to clients. Mutual fund A shares charge an upfront commission and are typically better for long-term investors, while B shares charge higher exit fees.
The firm failed to reasonably supervise the trades of one unnamed registered rep, according to Finra, and over five years clients incurred more than $1.6 million in unnecessary charges.
Emerson Equity and Baldini agreed to Finra’s findings without admitting or denying them. The firm was fined $60,000 and will pay more than $1.6 million in restitution to clients. Baldini was fined $5,000 and was suspended for 20 days from the industry as a principal.
Calls Monday to Emerson Equity’s home office in San Mateo, California, were not returned.
Meanwhile, Triad Advisors on Dec. 29 agreed to a fine of $195,000 and restitution of $510,000, plus interest, in its settlement with Finra, in which it neither admitted to or denied Finra’s findings.
According to Finra, from 2016 to 2018, Triad didn’t reasonably supervise registered reps’ sales of the LJM Preservation & Growth Fund. According to Finra, the firm allowed the sale of the fund without conducting reasonable due diligence on LJM and without a sufficient understanding of its risks and features, including the fund’s strategy of buying uncovered options. The fund collapsed during a bout of market volatility in February 2018.
A spokesperson for Advisor Group on Monday did not return calls to comment.
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