FINRA Suspends Centaurus Broker for Unsuitable Alts Guidance to Three Clients
The Financial Industry Regulatory Authority has fined and suspended a registered broker for allegedly recommending unsuitable and highly concentrated alternative investments to three clients. The Dallas suburb-based broker, William C. Burks II, accepted the sanctions without admitting or denying the findings, as outlined in a letter of acceptance, waiver, and consent.
According to the FINRA investigation, which originated from customer arbitration filings, Burks, who has been registered with Centaurus Financial since 2000, recommended that three customers invest a disproportionately large percentage of their assets – ranging from 51% to 91% of their net worth – in alternative investments between February 2017 and April 2020. These investments, which included non-traded real estate investment trusts, business development companies and interval funds, were illiquid or had limited liquidity.
Most firms limit adviser sales of alternative investments to around 10% of a customer’s net worth. FINRA’s findings state that Burks’ recommendations violated two key rules:
FINRA Rule 2111 (Suitability): This rule requires brokers to have a reasonable basis to believe that a recommended investment is suitable for a customer based on their investment profile, including risk tolerance, investment objectives, and financial situation. The investigation found that the three customers had low to moderate risk tolerance and sought to preserve capital and generate income, making the high-risk, illiquid investments unsuitable.
FINRA Rule 2010 (Standards of Commercial Honor): This rule requires associated persons to “observe high standards of commercial honor and just and equitable principles of trade.” A violation of the suitability rule is also considered a violation of this broader rule.
The AWC stated that the concentration of the alternative investments in the trio of customers’ portfolios exceeded the firm’s own concentration guidelines, and this fact was not reflected in the transaction paperwork submitted to the firm.
FINRA has previously warned about the specific risks of alternative investments due to their illiquidity and not being traded on public exchanges.
As a result of his conduct, Burks consented to a four-month suspension from associating with any FINRA member in all capacities and was issued a $10,000 fine. The suspension means he is prohibited from performing any functions for a FINRA member firm, including clerical or ministerial duties, during this period.
Two of the three customers involved in the matter have already reached settlements through the arbitration process concerning the recommendations.
Centaurus Financial is a large independent broker-dealer based in Southern California with 375 branch offices and 615 brokers and financial advisers.
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