February 5, 2021
The Financial Industry Regulatory Authority (FINRA) Department of Enforcement recently approved a Letter of Acceptance, Waiver and Consent (AWC) jointly submitted by PHX Financial, Inc. to resolve allegations of violating FINRA Rules for failing to maintain a supervisory system to prevent registered representatives from engaging in excessive and unauthorized trading over several years.
According to the AWC, PHX failed to reasonably enforce its written supervisory procedures related to options from May 2013 through April 2016, in violation of NASD Rule 3010 and FINRA Rules 2360, 3110, and 2010.
From January 2013 to April 2019, PHX allegedly failed to establish and maintain a supervisory system and written supervisory procedures and policies that were reasonably designed to achieve compliance with securities regulations related to unsuitable excessive trading in customer accounts. From January 2013 through April 2016, the Firm performed a manual review of a daily trade blotter as its primary method to detect excessive trading. However, the daily trade blotter did not identify patterns of trading or facilitate the calculation of cost-to-equity ratios and turnover rates to identify red flags of potential excessive trading. The firm continued with this practice in mid-2017 after a short stint using automated exception reports for excessive trading provided by its clearing firm.
During this time, Delaplain was associated with PHX in numerous capacities including as its Compliance Official. FINRA alleges in the AWC that from June 2013 to April 2015, Delaplain failed to supervise two registered representatives who engaged in unsuitable excessive trading and unsuitable options trading in two customer accounts.
One of these two producing brokers, Halil Kozi, held the role of Registered Options & Securities Futures Principal (ROSFP), whose responsibilities included reviewing suitability and risk tolerance when an options was opened and conducting ongoing suitability reviews including size and frequency of trades and concentration of a customer’s account in a particular options trade, among other things. PHX not only failed to supervise Kozi to ensure he was performing his duties as ROSFP, but the firm failed to detect that Kozi effected over 100 solicited trades involving speculative options trading strategies in a customer’s account that were unsuitable for the customer’s balanced growth investment objective and moderate risk tolerance while he acted as the ROSFP. This activity resulted in approximately $550,000 in losses for the customers and gross commissions of over $350,000. As a result, PHX and Delaplain violated NASD Rule 3010(a) and FINRA Rules 3110(a) and 2010.
Finally, FINRA Department of Enforcement asserts in the AWC that, due to PHX’s failure to investigate five private-placement offerings and their suitability based on customers’ investment objectives, before recommending and selling them to eleven customers, PHX violated FINRA Rules 2111(a), 3110(a) and (b) and 2010.
By signing the AWC, PHX and Delaplain consented to the imposition of FINRA sanctions to resolve the alleged violations. PHX consented to a censure, $50,000 fine and restitution to the affected customers totaling $356,711, plus interest. Delaplain consented to a six-month suspension from associating with any FINRA member firm in any principal capacity and a $5,000 fine. Delaplain is also required pass the requisite examination to re-qualify to act in any principal capacity again.