According to FINRA, Kayan Securities, Inc. was censured and ordered to pay $50,000 in partial restitution to a customer, while principal Yong Soo Kim was fined $5,000 and suspended from association in any principal capacity for two months.
The firm and Kim were found to have failed to establish and maintain a supervisory system reasonably designed to achieve compliance with suitability requirements and Regulation BI's Care Obligation as they pertain to excessive trading. The firm's supervisory system consisted merely of Kim reviewing daily order logs and monthly active trading reports from the clearing firm, which proved inadequate to detect and prevent excessive and unauthorized trading.
Most troubling was the firm's handling of a registered representative who engaged in unauthorized and excessive trading in customer accounts, including a senior customer's account. Despite multiple red flags, Kim and the firm failed to take appropriate action. Kim never contacted two of the affected customers. When the first customer complained, the firm and Kim failed to conduct a reasonable investigation. For a third customer, Kim merely had the representative obtain a revised account application to change the investment objective and risk tolerance to match the trading that had already occurred. Even when the representative admitted to unauthorized trading, the firm only fined him and allowed him to continue trading in other customer accounts until he was barred by FINRA.
Additionally, the firm failed to properly disclose two customer complaints and failed to update the representative's Form U4 and Form U5 to report written customer complaints alleging sales practice violations.
Investors can learn from this case that effective supervision is essential to protect them from rogue brokers. A supervisory system that relies solely on reviewing reports after the fact, without proactive monitoring or investigation of red flags, is inadequate. Customers should be alert to unauthorized trading in their accounts and should report concerns immediately to both the firm and to FINRA.
