Hightower Securities Hit With $353K Penalty For Alt Fund Sales By FINRA

Chicago-based Hightower Securities, the broker-dealer for Hightower Advisors, recently found itself at the center of a financial maelstrom. The Financial Industry Regulatory Authority (FINRA) has ordered it to pay over $353,000 for transgressions related to the sales of two alternative funds.

The hefty penalty imposed on Hightower Securities is composed of a $100,000 fine and a restitution of $253,177. This decision emerged from a settlement concluded last Friday. Of the total restitution amount, $133,600 is directed towards customers who invested in a GPB Capital automotive fund, which was indicted for fraud by the Securities and Exchange Commission (SEC) in 2021. The remaining $119,577 will be distributed among investors in the LJM Preservation & Growth Fund, a fund which suffered a significant loss of value in a single day in February 2018.

The censure originates from the accusations lodged by FINRA that Hightower failed to communicate crucial information to prospective investors, such as the fact that GPB missed regulatory reporting deadlines in 2018 due to an audit. This audit was spurred by allegations from a former executive who claimed that GPB defrauded its investors.

Interestingly, after being notified of the delayed reports, Hightower sold 16 limited partnership interests worth $1.67 million in 2018. The restitution amount imposed by FINRA mirrors the total commissions that Hightower accumulated from these sales. This violation, along with others, led FINRA to allege that Hightower violated its Rule 2010, which mandates “high standards.”

In response to the allegations, a spokesperson for Hightower asserted that the firm is “pleased to have resolved these matters” and pledged to “continue to follow fiduciary best practices and regulatory standards for our clients’ investments.” The firm settled the allegations without admitting or denying FINRA’s claims.

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Additionally, FINRA stated that Hightower failed to establish an adequate supervisory system to scrutinize the sales of complex products. Evidence of this failure is shown in the wrongful sale of $190,000 in shares of the LJM fund to three clients, including two with a low risk tolerance, from March 2016 to February 2018. These clients witnessed a devastating loss of roughly 80% of their investment in the LJM fund in one day in February 2018, when the S&P 500 declined by 4.1%, leading to a sudden increase in market volatility.

FINRA found that Hightower’s compliance policies did not specify whether a new mutual fund on the platform was classified as a “complex product.” Additionally, it did not provide “reasonable guidance” or training to brokers about the risks associated with alternative mutual funds. The firm’s electronic trading review system also failed to flag potentially high-risk mutual funds for additional scrutiny.

These circumstances led to the conclusion that “Hightower Securities’ supervision of its representatives’ recommendations of alternative mutual funds was not reasonable in several respects,” according to FINRA. Max Schatzow, co-founder and partner at RIA Lawyers, noted that the violations seem to be connected to “isolated” instances involving two products that have become a regulatory focus.

Despite these hiccups, Hightower, founded in 2009, has managed to retain its position as a leading player in the financial industry. As of now, it oversees nearly $144 billion in assets through its 128 advisor teams, upholding the fiduciary standard and striving to put client interests first. However, these recent infractions and subsequent penalty mark a significant setback for the firm, putting its commitment to investor protection under serious scrutiny.

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