A FINRA Hearing Panel has hammered Brookstone Securities of Lakeland, Florida. According to a FINRA release, the panel found that from July 2005 through July 2007, the firms owner and a former broker “intentionally made fraudulent misrepresentations and omissions to elderly and unsophisticated customers regarding the risks associated with investing in [collateralized mortgage obligations].” The panel fined Brookstone $1 million and ordered it to pay restitution of more than $1.6 million to customers. The decision may be appealed to FINRA’s National Adjudicatory Council.
A collateralized mortgage obligations or “CMO” is a security that is collateralized by mortgage-backed securities, which in turn are undivided interests in a pool of mortgages. The principal and interest from the mortgages underlying a mortgage-backed securities are used to pay CMO investors principal and/or interest, depending on the type, or “tranche,” of CMO that they own. CMOs are classified, in part, based on the entity that guarantees them.
In Notice to Member 93-78,FINRA provided guidance to brokers alerting them to their obligations when recommending CMOs stating, in part, that
In light of the complexity and the varying risk characteristics of CMOs, under Article III, Sections 1 and 2 of the Rules of Fair Practice, members and their associated persons must be conversant in all of the characteristics of CMOs to assess adequately the suitability of CMOs for their customers. Moreover, they must ensure that their customers understand the characteristics and risks of CMOs. Further, adequate supervisory procedures must be in place to monitor CMO activity within each NASD member firm.