Initiated By
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Allegations
The Securities and Exchange Commission (the "Commission" or "SEC") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Integral Financial, LLC ("Integral") and Weiming "Frank" Ho ("Ho") (collectively, "Respondents").
The Commission finds that between 2015 and 2017, four registered representatives employed by Integral ("RRs") made unsuitable recommendations of highly-complex and high-risk variable interest rate structured products ("VRSPs") to ten retail customers ("Customers").
The VRSPs recommended to the Customers are complex, illiquid, structured securities with maturity periods of fifteen years or more. Unlike traditional bonds, the VRSPs offer variable interest payments based on formulas tied to differences in Constant Maturity Swap ("CMS") rates for longer term and shorter term United States Treasury obligations. The VRSPs initially paid fixed, introductory or "teaser" rates for one to five years. After the teaser interest rate period, interest payments are not guaranteed and are contingent on the performance and interplay of the VRSPs derivative components such as the CMS rates and underlying reference assets.
The RRs made unsuitable recommendations of VRSPs to the Customers, most of whom were approaching or had reached retirement age and relied on their investments for income. The RRs recommended VRSPs to the Customers even though they knew or should have known that the Customers, among other considerations: had conservative or moderate risk tolerances and investment objectives; investment time horizons of less than fifteen years; limited investment experience; net worth in most cases of less than $500,000; were unwilling to risk losing their invested principal; and expected periodic interest payments from their investments. By making unsuitable recommendations of VSRPs to the Customers, the Integral RRs and Integral violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Ho was a cause of those violations.
Integral and Ho failed reasonably to supervise the RRs with a view to preventing their violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act arising from the unsuitable recommendations. Integral failed to implement its customer-specific suitability policies and procedures, including its Written Supervisory Procedures ("WSPs"). Ho, Integral's principal and sole supervisor, was designated as the person responsible for implementing the firm's policies and procedures concerning customer-specific suitability, but failed to do so.
Integral failed to create certain required records relating to customer accounts. Integral failed to make and keep current a record indicating that Integral furnished to each customer, at intervals no greater than thirty-six months, a copy of the account record or an alternate document with all information required by Rule including, among other things, the customer's annual income and net worth, and the account's investment objectives. Further, Integral failed to make and keep current a record indicating that, for each change in a customer's account investment objectives, Integral furnished the customer with a copy of the updated account record or alternative document containing the information required by Rule on or before the 30th day after receiving notice of a change.
Integral violated Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(17)(i)(B)(1) and 17a-3(a)(17)(i)(B)(3) thereunder. Ho was responsible for overseeing the firm's compliance with the broker-dealer books and records provisions, but failed to monitor whether, and implement any procedures to ensure that, the requisite records were made and kept current. As a result, Ho caused Integral's books and records violations.
Resolution
Order
Sanctions
Cease and Desist
Sanctions
Civil and Administrative Penalty(ies)/Fine(s)
Amount
$30,000.00
Sanctions
Ho be, and hereby is, subject to the following limitations on his activities: Ho shall not act in a supervisory capacity with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization for six (6) months.
Broker Comment
Respondent Ho has submitted Offers of Settlement, which the Commission has determined to accept. Accordingly, it is hereby ORDERED that Ho shall cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 17(a) of the Exchange Act and Rules 17a-3(a)(17)(i)(B)(1) and 17a-3(a)(17)(i)(B)(3) thereunder; and shall pay a civil money penalty of $30,000 to the Commission. Ho be, and hereby is, subject to the following limitations on his activities: Ho shall not act in a supervisory capacity with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization for six (6) months.