CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC. ANONYMOUS CASE HISTORIES NUMBER 27713

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1 CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC. ANONYMOUS CASE HISTORIES NUMBER This is a summary of order issued following the February 2017 hearings of the Disciplinary and Ethics Commission ( the Commission ) of Certified Financial Planner Board of Standards, Inc. ( CFP Board ). The conduct at issue in this case occurred both prior to and after January 1, The Rules in effect for conduct occurring prior to January 1, 2009 were Rules 101 through 705 of the Code of Ethics and the rules in effect for conduct occurring after January 1, 2009 were Rules 1.1 through 6.5 of the Rules of Conduct. I. Issue Presented Whether a CFP professional ( Respondent ) violated CFP Board s Standards of Professional Conduct when he recommended and sold clients alternative investments that resulted in an unsuitable concentration of the clients assets in alternative investments and were unsuitable due to the clients ages, risk tolerances, and investment objectives. II. Findings of Fact Respondent s Sale of Unsuitable Alternative Investments to VP and FP VP and FP were in their mid-60s when they started working with Respondent in FP died after an operation in or around VP had a net worth of approximately $1,300,000 consisting of an IRA and a fixed annuity. VP s investment objective was preserving principal and earning a moderate income. From 2006 through 2008, Respondent sold VP and FP three alternative investments totaling almost $249,000. The investments were GIA almost $39,000, LLE Fund - $43,000, and MS Fund almost $167,000. Respondent sold the MS Fund to VP in March The alternative investments Respondent sold to VP and FP comprised virtually all of their liquid net worth. In June 2011, VP filed a Statement of Claim in a Financial Industry Regulatory Authority, Inc. ( FINRA ) Arbitration alleging that Respondent sold her unsuitable investments. In July 2012, the parties settled the matter for $105,000 in favor of VP. Respondent s Sale of Unsuitable Alternative Investments to LB and CB LB was 78 years old in Respondent stated that LB and CB, LB s wife of 58 years, had accounts totaling $850,000. LB wanted and needed conservative, low risk investments that provided income. From 2006 through 2008, Respondent sold the LB and CB five alternative investments totaling $265,000. The investments are WR Shares - $50,000, IAG - $50,000, TER Trust - $50,000, VDO Notes - $50,000, and MS Fund - $65,000. Respondent sold the MS Fund to LB and CB in September 2008 when LB was 75 years old. The alternative investments Respondent sold to LB resulted in 31% of his net worth being invested in alternative investments. In December 2011, LB filed a Statement of Claim against Respondent in a FINRA Arbitration. LB alleged that Respondent sold him unsuitable alternative investments. In November 2012, the parties settled the matter for over $82,000 in favor of LB

2 Respondent s Sale of Unsuitable Alternative Investments to AS AS was 87 years old in She had a net worth of $2,000,000. AS needed safe investments that would produce income. From 2005 to 2009, Respondent sold AS and her husband six alternative investments totaling over $448,000. They were RHB - $50,000, PRE - $75,000, FDU - $90,000, VDO Notes - $100,000, MS Fund, NFB - $53, Respondent sold the MS Fund and NFB to AS in The alternative investments Respondent sold to AS and her husband resulted in 22% of their entire net worth being invested in alternative investments. In March 2012, AS filed a Statement of Claim in a FINRA Arbitration alleging Respondent sold her unsuitable alternative investments. In July 2013, the parties settled the matter for almost $146,000 in favor of AS. Respondent s Sale of Unsuitable Alternative Investments to LB and Others In September 2012, LB (age 58), TE (age 71), RH and CH (ages 71 and 60), AL (age 48), TF (age 88), and GK (age 77) filed an Amended Statement of Claim in a FINRA Arbitration alleging that ICC, through Respondent, sold them unsuitable alternative investments. Respondent provided CFP Board with the Answer filed by ICC in which the company asserted that it performed adequate due diligence on the investments. The Statement of Claim and Answer lack information on the clients net worth and investment objectives. The parties settled the claim for over $261,000 in favor of the claimants. Respondent s Sale of Unsuitable Alternative Investments to EW and Others EW was 92 years old in EW wanted safe, conservative, low-risk investments. From 2006 through 2007, Respondent sold EW $500,000 in alternative investments. DR and KR were 67 and 66 years old in DR and KR wanted safe, conservative, low-risk investments. Respondent stated that they had a net worth of $1,000,000. Starting in 2006, Respondent sold DR and KR eight alternative investments totaling $325,000. The alternative investments Respondent sold to the Rockers resulted in 32.5% of their net worth being invested in alternative investments. JM was 81 years old in He wanted safe, conservative, low-risk investments. From 2007 through 2011, Respondent sold JM three alternative investments totaling almost $105,000. In December 2012, EW, DR and KR, and JM filed a Statement of Claim in a FINRA Arbitration alleging Respondent sold them unsuitable alternative investments. In March 2014, the parties settled the matter for over $230,000 in favor of the claimants. Respondent s Sale of Unsuitable Alternative Investments to AL and FL AL and FL were 76 and 65 years old in Respondent said AL and FL had a net worth of $1,000,000. AL and FL indicated that their investment objectives were conservative investments, preservation of capital and income for retirement. In 2008, Respondent sold AL and FL the MS Fund for $70,000. The alternative investments Respondent sold to AL and FL comprised 7% of their net worth. In March 2013, AL and FL filed a Statement of Claim in a FINRA Arbitration alleging that Respondent sold them unsuitable alternative investments. In March 2014, the parties settled the matter for over $32,000 in favor of the claimants

3 Respondent s Sale of Unsuitable Alternative Investments to RT and JT In July 2013, RT and JT filed a Statement of Claim in a FINRA Arbitration alleging that Respondent sold them unsuitable alternative investments. Respondent said he sold RT and JT $225,000 of alternative investments, consisting of MS Fund - $40,000, RW - $25,000, FUD - $50,000, GUS - $50,000, REC - $50,000, and CEL - $10,000. In December 2014, the parties settled the claim for $115,000 in favor of RT and JT. Respondent said he could not provide CFP Board any documents because he is no longer working at ICC and does not have access to them. Respondent s Sale of Unsuitable Alternative Investments to BM and RM In April 2014, BM and RM filed a Statement of Claim in FINRA Arbitration alleging that Respondent sold them unsuitable alternative investments. Respondent said this was OD. In May 2015, the parties settled the claim for $132,000 in favor of the BM and RM. Respondent said he could not provide CFP Board any documents because he is no longer working at ICC and does not have access to them. Respondent s Sale of Unsuitable Alternative Investments to EE and AE In May 2014, EE and AE filed a Statement of Claim in a FINRA Arbitration alleging that Respondent sold them unsuitable alternative investments. Respondent said this was MS Fund. In November 2015, the parties settled the claim for $140,000 in favor of EE and AE. Respondent said he could not provide CFP Board any documents because he is no longer working at ICC and does not have access to them. III. Grounds for Discipline First Ground for Discipline Pursuant to Article 3(a) of the Disciplinary Rules and Procedures ( Disciplinary Rules ), there are grounds to discipline Respondent for acts or omissions that violate Rule 201 of the Code of Ethics, which provides that a CFP Board designee shall exercise reasonable and prudent professional judgment in providing professional services. The Commission found that Respondent failed to exercise reasonable and prudent professional judgment in providing professional services when, as set forth above and in the documents attached to the Complaint, he: (a) recommended and sold clients alternative investments that resulted in an unsuitable concentration of the clients assets in alternative investments; and (b) recommended and sold clients unsuitable alternative investments that were unsuitable due to the clients ages, risk tolerances, and investment objectives. Institutional investors allocations provide useful guidelines on the level of appropriate real estate exposure for the typical investor. Federal, state, and local government pension funds allocated an average of 3.1% to 6.5% of their total portfolios to U.S. real estate from 2000 to Broker-dealers also have their own limits on the amount of alternative investments their brokers can sell to clients. Firm 1 s Alternative Investment Purchase form provides Alternative Investment Approval Guidelines for clients less than 70 years old and clients 70 years old and older, based on their investment objectives and net worth. For clients less than 70 years of age, the percentage of alternative investments permissible range is from 0-35% of the client s net worth. For clients age 70 and above, the percentage of alternative investments permissible range is from 0-15% of the client s net worth

4 Firm 2 s Alternative Investment Worksheet requires brokers to provide additional justification to sell clients alternative investments in a single sector that exceeds 20% of a client s net worth and any combination of alternative investments that totals more than 30% of a client s net worth. Firm 3 s Alternative Investment Purchase Acknowledgement states that, for the purposes of diversification, a representative should invest no more than 20% of a client s net worth in alternative investments. Firm 4 s has an Alternative Investment Purchase Approved 1031 Exchange Product form specifically for TICs that limits the sale of TICs to 50% of a client s net worth regardless of the client s investment objective. Respondent violated the standard of care he owed his clients because, as set forth above, Respondent recommended that his clients invest, and caused them to invest, a higher concentration of their net worth in alternative investments than is appropriate. Thus, Respondent violated Rule 201 of the Code of Ethics. Second Ground for Discipline that violate Rule 1.4 of the Rules of Conduct, which provides that a certificant shall place the interest of the client ahead of his or her own. The Commission found that Respondent failed to put the interest of the clients ahead of his own when, as set forth above and in the documents attached to the Complaint, he: (a) recommended and sold clients alternative investments that resulted in an unsuitable concentration of the clients assets in alternative investments; and (b) recommended and sold clients unsuitable alternative investments that were unsuitable due to the clients ages, risk tolerances, and investment objectives. Thus, Respondent violated Rule 1.4 of the Rules of Conduct. Third Ground for Discipline that violate Rule 4.5 of the Rules of Conduct, which provides that a certificant shall make and/or implement only recommendations that are suitable for the client. The Commission found that Respondent made and implemented unsuitable recommendations when, as set forth above and in the documents attached to the Complaint, he: (a) recommended and sold clients alternative investments that resulted in an unsuitable concentration of the clients assets in alternative investments; and (b) recommended and sold clients unsuitable alternative investments that were unsuitable due to the clients ages, risk tolerances, and investment objectives. Thus, Respondent violated Rule 4.5 of the Rules of Conduct. Fourth Ground for Discipline that violate Rule 6.5 of the Rules of Conduct, which provides that a certificant shall not engage in conduct that reflects adversely on his or her integrity or fitness as a certificant, upon the CFP marks, or the profession. The Commission found that Respondent engaged in conduct that reflects adversely on his integrity and fitness as a certificant, upon the CFP marks, or the profession when, as set forth above and in the documents attached to the Complaint, he: (a) recommended and sold clients alternative investments that resulted in an unsuitable concentration of the clients assets in alternative investments; and (b) recommended and sold clients unsuitable alternative investments that were unsuitable due to the clients ages, risk tolerances, and investment objectives. Thus, Respondent violated Rule 6.5 of the Rules of Conduct

5 IV. Discipline Imposed The Commission determined that Respondent s conduct Rule 201 of the Code of Ethics and Rules 1.4, 4.5, and 6.5 of the Rules of Conduct, providing grounds for discipline under Article 3(a) of the Disciplinary Rules. Upon consideration of the facts presented, the Commission issued to Respondent a one-year Suspension of his CFP certification pursuant to Article 4.3 of the Disciplinary Rules. In arriving at its decision, the Commission consulted Sanction Guidelines 31 (Suitability Violation). The Commission also consulted Anonymous Case Histories 24228, 26476, 28783, and The Commission cited in mitigation that (i) Respondent did not have a prior disciplinary history with the CFP Board of Standards, (ii) FINRA did not impose any fines on Respondent, (iii) Respondent helped his clients recoup their lost funds, (iv) there were not any guidelines at Respondent s firm that gave direction on the maximum investment clients should have in alternative investments and the firm appeared to be encouraging the sale of such products, and (v) Respondent stated he is currently focusing on fee based financial planning and is not selling private placements or TIC products. The Commission considered in aggravation that (i) this investigation was the result of a grievance brought to CFP Board, (ii) Respondent holds series 24 and 26 licenses and, as a principle, should have known the investments that were the subject of this proceeding were inappropriate, (iii) the number of claims of unsuitable investments, (iv) not all of the clients involved were accredited, and (v) Respondent put illiquid private placement investments that totaled 100% of the client s liquid net worth in a traditional IRA of a client who was close to the age when Minimum Required Distributions would have to be taken from the IRA in order to avoid a failure to withdraw penalty from being imposed