According to FINRA, Kingswood Capital Partners, LLC was censured and fined $150,000 for failing to establish adequate written procedures for supervising alternative investment recommendations and for failing to reasonably supervise a registered representative who made unsuitable alternative investment recommendations to three senior customers.

The firm's written supervisory procedures were fundamentally deficient regarding alternative investments. The procedures did not describe what factors supervisors should consider when assessing concentration in alternative investments, how concentration determinations should be made, or provide any guidance on what would constitute an overconcentrated position. The procedures also failed to describe what steps supervisors should take upon finding a potentially overconcentrated position or how supervisory reviews should be documented.

These procedural deficiencies led to failures in actual supervision. Despite red flags that a representative's recommendations were unsuitable, the firm approved transactions that allowed three senior customers—each with moderate risk tolerance and balanced growth investment objectives—to invest a total of $284,000 in illiquid alternative investments. Alternative investments typically involve higher risks, less liquidity, and longer time horizons than traditional investments, making them particularly unsuitable for seniors with moderate risk tolerance who may need access to their funds.

The failure to conduct reasonable supervisory review before approving these transactions resulted in real harm to customers. All three customers (or their beneficiaries) subsequently brought and settled arbitration claims against the firm related to these alternative investments.

Alternative investments, including non-traded REITs, business development companies, and private placements, have become increasingly common in retail portfolios. However, these products carry unique risks including illiquidity, complexity, high fees, and limited transparency. FINRA rules require firms to conduct reasonable due diligence on these products and ensure recommendations are suitable based on customers' financial situations and investment objectives.

This case illustrates the critical importance of robust supervisory systems for alternative investments, particularly when recommended to seniors. Firms must have clear, detailed procedures that guide supervisors in identifying potentially unsuitable concentrations and require meaningful review before approving transactions.