← Broker database 2022-09-26
Crescent Securities Fined $30,000 for Fair Pricing Supervision Failures
According to FINRA, Crescent Securities Group, Inc. was fined $30,000 for failing to establish and enforce a supervisory system reasonably designed to achieve compliance with FINRA's fair pricing rule.
The findings revealed that registered representatives at the firm bought and sold over $161 million of inverse floating rate collateralized mortgage obligations, which they sold to institutional customers. Despite the significant volume of these complex securities transactions, the firm failed to apply the criteria of FINRA Rule 2121.01 to the representatives' sales of inverse floaters. Instead, the firm reviewed the markups and markdowns of the inverse floaters only to verify that they were five percent or below, applying a simplistic threshold test rather than conducting the required comprehensive fair pricing analysis.
The firm did not conduct a review of the rule factors for the markups and markdowns it charged in each of these transactions. By failing to conduct the fair pricing analysis required under FINRA rules, the firm failed to reasonably determine whether the inverse floater transactions were priced fairly to customers.
FINRA Rule 2121 requires firms to consider multiple factors when determining whether markups and markdowns are fair and reasonable, including the type of security, its availability in the market, the price of the security, the amount of money involved in the transaction, the pattern of markups or markdowns, and the nature of the firm's business. The rule recognizes that a simple percentage threshold is insufficient to determine fairness, particularly for complex or illiquid securities like inverse floating rate CMOs.
Inverse floaters are complex mortgage-backed securities whose interest rates move in the opposite direction of market interest rates, making them particularly sensitive to interest rate risk. These securities can be difficult to value and may have limited liquidity, making the fair pricing analysis even more critical. When firms fail to properly analyze whether their markups and markdowns are fair, institutional customers may pay more than they should for securities, and the firm may be profiting at the customers' expense.
This case underscores the importance of firms having proper procedures to ensure fair pricing for all securities transactions, particularly complex instruments. A one-size-fits-all approach based solely on a percentage threshold is inadequate and fails to protect customers from excessive markups or markdowns. Investors, including sophisticated institutional investors, rely on their broker-dealers to charge fair and reasonable prices, and firms must have systems in place to ensure compliance with this fundamental obligation.