According to FINRA, First Horizon Advisors, Inc. was censured and fined $175,000 for failing to reasonably supervise a registered representative who operated an undisclosed outside business activity involving an investment club.

A representative at the firm controlled and operated an investment club formed as a limited liability company. He solicited individuals to invest in the club by claiming he had earned annual returns of between 15 and 20 percent. The representative used the funds to trade options in a brokerage account held away from the firm. Despite his promises, investors experienced significant losses.

The firm failed to investigate numerous red flags. When the representative ultimately disclosed the outside brokerage account, the firm did not question when the account was opened or why he had failed to disclose it in a timely manner. The firm failed to review statements for the period when the account was open but not disclosed. Although the representative claimed the account was funded by proceeds from land he had sold and held in the name of an LLC, the firm never asked about the nature of the LLC's ongoing business or the representative's activities in connection with it.

Additionally, the firm failed to identify or investigate red flags contained in emails sent to and from the representative's firm email address concerning his participation in the investment club. The firm's supervisory failures extended to its email review procedures. Contrary to its written procedures, the firm reviewed only three percent of emails that contained search terms requiring review, and that review was generally limited to the subject line rather than the body of the email.

Investors should understand that registered representatives must disclose outside business activities to their firms, and firms must supervise these activities. Investment clubs that pool money and promise high returns without proper oversight can result in significant losses. The failure to supervise email communications is particularly concerning as it allows misconduct to go undetected. Always verify that your financial advisor is operating within the scope of their firm's oversight and be cautious of side investments or business ventures.