Aegis Capital Corporation (CRD#15007) has reached an agreement with the US Securities and Exchange Commission (SEC) regarding the recommendations and sales of a complex and risky investment called variable interest rate structured products, or VRSP. The SEC filed a cease-and-desist order on July 28, 2022. In response, Aegis submitted an offer of settlement.
The action is the result of Aegis representatives making highly unsuitable recommendations to customers in two of their branch offices: Melville, NY, and Boca Raton, FL. In both cases, the company’s supervisory procedures were not properly followed in relation to these recommendations to retail customers as well as material misstatements and omissions. Institutional customers were not affected.
These high-risk, illiquid investments are known as “principal at risk” investments because investors may or may not lose their principal. They have 15-year maturity periods and are not traded on any public market. Investors may have to keep them the entire 15-year period, since they are unlikely to be able to sell them on a secondary market.
Clients who buy VRSPs as an investment should have risk tolerances of “high” or “maximum,” and investment objectives rated as “aggressive growth/aggressive income,” or “speculation”.
VRSPs are generally offered by large financial institutions. They offer guaranteed fixed-rate interest payments for one to three years. Once the initial period is over, any interest payments are occasional and based on specific criteria. There are no guarantees, and investors may not receive any interest payments for the remainder of the maturity period.
Aegis’ own preliminary prospectus warned of these possibilities, the lack of a secondary market to provide liquidity, and the need for holding these securities to full maturity.
Although Aegis made these statements and indicated that all customers should be forewarned of these risks, some of the registered reps failed to inform their customers of these facts before purchasing. Brokers and representatives were required to assess the suitability of VRSPs for each customer prior to recommending them. This includes reviewing the client’s investment objectives, risk tolerance, and other suitability factors. In all, Aegis representatives made VRSP recommendations to 48 of the firm’s customers between the Melville and Boca Raton offices.
The Melville, NY Office
The firm assigned responsibility of policy implementation to the Melville branch manager. From January 2015 through February 2018, the branch manager was responsible for the office’s daily trade reviews under the firm’s written supervisory procedures (WSPs.)
In February of 2016, Aegis established procedures here regarding structured products, and sent this information in a high-priority email to the Melville supervisors and representatives. Mandatory training and a disclosure form specific to the VSRPs were required before recommending them to customers. The forms included a clause for compliance with their suitability determination for clients prior to recommendations.
New requirements were added in December of 2016, establishing minimum requirements for customers before recommending VRSPs. These were also communicated in a high-priority email.
Eleven Aegis representatives in the Melville office made unsuitable recommendations of VRSPs to multiple retail customers based on their account information and investment profiles.
The Boca Raton, FL Office
The policies that initially included the Melville office were made company-wide in July of 2017. This included the office in Boca Raton. Supervisors and representatives were notified with a high-priority email. The procedures were essentially the same as the ones for Melville, including structured products procedures and the mandatory training for them. The training included instructions that warned, “Don’t guarantee anything. Markets might not cooperate.”
The procedures included a requirement for supervisors to conduct a suitability review for recommendations made to customers aged 70 and older. Included in the requirements was the presence of an “Active Trading Letter” signed by supervisors, representatives, and customers for frequently traded non-discretionary accounts.
Three Aegis representatives in the Boca Raton office made similar recommendations to at least seven of the firm’s customers. One representative, Alan Appelbaum (CRD#: 500336), made more than 1,000 trades for seven customers over the age of 55. Their accounts were non-discretionary. He has been charged separately by the SEC. He failed to have any of his customers sign Active Trading Letters as required.
Along with Appelbaum, another representative in the Boca Raton office incorrectly stated to these customers that they were guaranteed to receive their entire invested principal back at the end of the 15-year maturity period. VRSPs have no such guarantee for principal protection, and investors can potentially lose all their principal.
The SEC’s order describes Aegis’ failures to create and implement systems:
- That would have both prevented and reveal violations in both branches of representatives’ violations of suitability, recommendations, errors and omissions about the VSRPs, and unauthorized trading
- Required supervisors to conduct individual suitability reviews for customers that were age 70 and older, which failed to reveal unsuitable recommendations from the representatives
- That would implement the structured product procedures initiated in Melville in 2016 and Boca Raton in 2017. Supervisors in both offices failed to follow these procedures, which allowed their respective representatives to make the unsuitable recommendations.
- To prevent unauthorized trading by representatives
- To implement mandatory training that would have prevented the misrepresentations, misstatements and omissions by representatives.
Aegis also failed to keep important customer records and neglected to furnish customers with copies of their account records as required every 36 months. The firm also failed to properly supervise their representatives to prevent and reveal any wrongdoing.
Aegis Capital Corporation Investor Recovery
In the agreement, the SEC has requested disgorgement of $165,828 and prejudgment interest of $55,037, along with fines of $2,300,000.
Aegis began retaining the services of compliance consultant beginning in January 2021 to redraft and revise the firm’s WSPs to include provisions to prevent the wrongdoing committed earlier. The company will submit to audits and annual reviews for the next three years to determine how well the revisions are working and make any changes necessary.
The original supervisors in the Melville office were replaced, and the office remains open. After terminating the employment of two representatives and one supervisor, Aegis closed their office in Boca Raton where most of the misconduct occurred.
The CEO has offered sworn certification that the remediation measures have been implemented, except for the three annual reviews.
Did You Invest In VSRPs With Aegis Capital Corporation?
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