According to FINRA, Paulson Investment Company LLC was censured, fined $150,000, and ordered to pay $185,215.35, plus interest, in restitution to customers for failing to reasonably supervise unsuitable recommendations to purchase variable interest rate structured products (VRSPs).

The firm's representatives recommended that customers with either low or moderate risk tolerances, or with a growth investment objective, purchase VRSPs that were unsuitable for the customers in light of the substantial risks of VRSPs, including the potential for long periods of earning potentially little or zero interest and loss of principal. The firm considered VRSPs to be non-conventional investments, and its written supervisory procedures restricted the sale of VRSPs to customers with aggressive or speculative investment objectives and risk tolerances higher than moderate. The procedures also required customers who purchased VRSPs to complete a disclosure form attesting that they had met those requirements.

However, the firm failed to enforce these requirements and did not obtain disclosure forms from the customers. The firm also did not take any steps to determine that the securities were suitable for the customers. Collectively, the customers paid more than $58,000 in sales charges for these unsuitable purchases, and half of the customers suffered total realized losses exceeding $50,000, even after accounting for income earned while they held the VRSPs.

Additionally, the representatives unsuitably recommended that other customers concentrate their accounts in VRSPs. The firm's supervisory system generated alerts whenever a customer's account became more than 40 percent or 50 percent concentrated in certain high-yield products, including VRSPs, depending on the customer's risk tolerance. Despite receiving hundreds of these concentration alerts for these customers, the firm did not take steps to prevent the representatives from soliciting additional VRSP purchases after their customers' accounts already were concentrated in VRSPs.

Collectively, those customers paid more than $78,000 in sales charges for unsuitable VRSP purchases, and six of the customers suffered total realized losses exceeding $123,000, even after accounting for income earned while they held the VRSPs. This case demonstrates that having supervisory systems and procedures in place is not enough; firms must actually enforce them.