Dually Registered Firm Sold Complex Structured Products to Retirees
The Securities and Exchange Commission has sanctioned Centaurus Financial, a dually registered firm, and two of its employees for unsuitable recommendations and sales of complex variable interest rate structured products (VRSPs) to certain CFI retail brokerage customers.
According to the SEC’s order, between June 2016 and July 2019, Atul Makharia and seven other registered reps (RRs) from CFI’s Lexington, South Carolina, branch office recommended VRSPs to 94 retail customers for whom such investments were unsuitable in light of each specific customers’ financial situations and needs.
Makharia and the other reps made these recommendations, the SEC states, “even though they knew, or reasonably should have known,” that the customers to whom these VRSPs were recommended:
were at or approaching retirement age;
had an annual income of less than $100,000;
in most cases, had a net worth of less than $500,000;
had a low or moderate risk tolerance;
had investment objectives that included, or were limited to, “income” and sought periodic interest payments;
had moderate or high liquidity needs;
had an investment time horizon of less than 15 years; and
were unwilling to risk losing all or some of their principal invested in the VRSPs.
Respondent Ricky Mantei, the branch manager and owner of CFI’s Lexington, South Carolina branch office “caused these violations,” the SEC order states. CFI and Mantei also “failed reasonably to supervise the CFI RRs with a view to preventing and detecting their violations,” the SEC said.
The VRSPs at issue are complex, structured securities with maturity periods of 15 years or more issued by large well-known financial institutions, the SEC explained.
The VRSPs initially offer guaranteed periodic fixed-interest rate payments, typically for one to three years, the SEC explained.
“After the fixed interest rate periods end, however, the VRSPs switch to periodic variable-interest rate payments,” the SEC said. ”The variable interest rate payments are calculated based on formulas tied to differences in Constant Maturity Swap (‘CMS’) rates for long-term and short-term U.S. Treasury obligations, typically referred to as the ‘yield curve.’”
