The United States Securities and Exchange Commission (SEC) has announced that two registered broker-dealers, Herbert J. Sims and Co., Inc. (“HJ Sims”) and Integral Financial, LLC (“Integral”), and Integral’s President, Weiming “Frank” Ho, agreed to settle charges in connection with the fraudulent sale of certain highly-complex and high-risk variable interest rate structured products (VRSPs) to retail customers.
According to the SEC’s order as to HJ Sims, thirteen HJ Sims registered representatives recommended VRSPs to forty-five retail customers for whom the VRSPs were unsuitable because the customers were at or approaching retirement age with low or moderate risk tolerance, their primary investment objectives were income or long term growth, their annual incomes were less than $250,000, and, in certain cases, they had a net worth of less than $500,000.
Customer information that was available to the HJ Sims registered representatives indicated that many of the Customers also sought to minimize exposure of their invested principal to loss.
According to the SEC’s order as to Integral and Ho, four Integral registered representatives made recommendations of VRSPs to ten retail customers for whom the recommendations were unsuitable in light of the customers’ investment objectives, as determined by the customers’ financial situation and needs, which included: conservative or moderate risk tolerances; investment time horizons of less than fifteen years; and limited investment experience.
The Integral customers also were at or approaching retirement age, were unwilling to risk losing their invested principal, expected to receive periodic interest payments from their investments, and, in certain cases, had a net worth of less than $500,000.
The SEC’s order further finds that Ho, Integral’s principal and sole supervisor, failed to implement the firm’s policies and procedures concerning customer-specific suitability. The SEC’s order also finds that Integral violated the broker-dealer books and records provisions of the federal securities laws, and that Ho failed to monitor whether, and implement procedures to ensure that, the requisite records were kept.
HJ Sims consented to the entry of the SEC’s order, which found that HJ Sims violated the anti-fraud provisions of Sections 17(a)(2) and17(a)(3) of the Securities Act of 1933 (“Securities Act”) and failed reasonably to supervise certain registered representatives within the meaning of Section 15(b)(4)(E) of the Securities Exchange Act of 1934 (“Exchange Act”) with a view to preventing their violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act.
Integral and Ho also consented to the entry of the SEC’s order, which found that Integral violated the anti-fraud provisions of Sections 17(a)(2) and 17(a)(3) of the Securities Act and the books and records provisions of Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(17)(i)(B)(1) and 17a-3(a)(17)(i)(B)(3) promulgated thereunder, and that Ho caused Integral’s anti-fraud and books and records violations. The SEC’s order also found that Integral and Ho failed reasonably to supervise certain registered representatives within the meaning of Section 15(b)(4)(E) of the Exchange Act with a view to preventing their violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act.
Without admitting or denying the findings in its order, HJ Sims agreed to a censure, to cease and desist from future violations of the charged provisions, to retain an independent compliance consultant to review its policies and procedures, and to pay a civil penalty of $250,000.
Also without admitting or denying the findings in their order, Integral and Ho agreed to cease and desist from future violations of the charged provisions, and Integral agreed to retain an independent compliance consultant to review its policies and procedures.
Integral agreed to be censured and pay a $85,000 civil penalty. Ho also agreed to be suspended from acting in a supervisory capacity for six months and pay a $30,000 civil penalty.