Securities Dealer Fined for Role in Sales of 'Alternatives'

Sep 4

WFG Investments Inc. of Dallas was reprimanded and fined $175,000 for failing to determine whether the sales of alternative investments exposed clients to excessive risk.

The Disciplinary Order, entered Sept. 3 by Securities Commissioner John Morgan, found that WFG violated the supervisory procedures it established to make sure its registered agents were selling suitable investments to clients. WFG’s procedures imposed a limit on how much of a customer’s account could be held in alternative investments, such as shares of non-traded Real Estate Investment Trusts (REITs). However, that limit was exceeded because WFG failed to review the sales made by certain agents.

The Order relates to WFG’s supervision of some agents registered with WFG who were also registered with an unaffiliated investment adviser. From 2009 to 2013, WFG regarded the sales of alternative investments by the dually registered agents as an activity of the investment adviser and failed to conduct its own review on whether the sales violated the limit on the holdings of alternatives in a customer’s account.

From 2011 to 2012, certain of these dually registered agents also recommended that customers buy stock in a company whose shares traded on the Over the Counter Bulletin Board (OTCBB), a trading service for small, risky companies that cannot meet the listing requirements of stock exchanges.

WFG’s written supervisory procedures required that prior to a recommendation that a customer purchase shares in an “OTC equity,” a principal of WFG must review the financial statements and other business information of the company to determine if there was a reasonable basis for the recommendation.

However, WFG did not conduct this review with respect to the dually registered agents because it regarded the trading activity to be part of the investment adviser’s business activity.

Securities Commissioner John Morgan said, “Broker-dealers utilizing sales agents who are also affiliated with a third-party investment adviser cannot evade their responsibility to supervise securities transactions conducted by the agents simply because of the investment advisory relationship.”