FINRA Suspends Former Broker Over Undisclosed Business Activities, Annuity Recommendation, and Customer Data Violations
From the desk of Jim Eccleston at Eccleston Law
The Financial Industry Regulatory Authority (FINRA) has suspended former registered representative Clayton K. Shum for four months and fined him $10,000 after finding that he engaged in undisclosed outside business activities, violated Regulation Best Interest through an annuity recommendation, and failed to safeguard customers' confidential information.
As ThinkAdvisor reports, FINRA determined that Shum violated FINRA Rules 3270 and 2010 between August 2021 and October 2022 while registered with Grove Point Investments. FINRA found that Shum engaged in outside business activities that carried a reasonable expectation of compensation without disclosing those activities to his firm.
The matter also involved allegations that Shum arranged personal financing activities for customers despite firm policies that prohibited such conduct without prior approval. Grove Point filed a Form U5 on January 12, 2023, stating that it discharged Shum for violating multiple firm policies, including a prohibition against arranging personal financing for securities clients.
According to ThinkAdvisor and FINRA's order, Shum assisted four customers with reverse mortgage transactions during the relevant period. FINRA found that he recommended reverse mortgages, advised one customer regarding specific loan terms, and helped all four customers prepare loan applications by gathering and relaying information on their behalf. Two of those customers were senior investors.
ThinkAdvisor reports that Shum never disclosed these activities to Grove Point. FINRA noted that the firm's written supervisory procedures prohibited registered representatives from arranging personal financing for customers without prior approval.
FINRA also found that Shum violated Regulation Best Interest and FINRA Rule 2010 in November 2022 when he recommended that an 84-year-old customer invest an additional $400,000 into an existing variable annuity and purchase a living benefit rider. FINRA explained that living benefit riders can provide guaranteed income benefits during an annuitant's lifetime but also carry additional costs, including higher fees, reduced death benefits, and new surrender schedules.
FINRA concluded that Shum lacked a reasonable basis to believe the recommendation served the customer's best interest given her age and investment profile. As ThinkAdvisor notes, Grove Point generally denied living benefit riders for customers older than 70 because those customers often are unlikely to receive sufficient benefits to justify the rider's costs. FINRA states that the customer informed Shum that she had low liquidity needs, making it unlikely that she would benefit from the rider's payout features.
The disciplinary action also addressed Shum's handling of confidential customer information after he left Grove Point and joined Aegis Capital. As ThinkAdvisor reports, FINRA found that Shum attempted to transition certain Grove Point customers to Aegis and needed customer information to complete account-opening paperwork. To accomplish that task, he emailed Grove Point forms containing Social Security numbers and dates of birth for four customers to a third-party business center.
According to ThinkAdvisor, FINRA determined that the customers neither authorized the disclosure nor received notice that Shum would share their information with the third-party business center or Aegis. FINRA further found that after the forms arrived at the business center, Shum printed them and used portions of the information to complete new account forms at Aegis.
Based on these findings, FINRA imposed a four-month suspension and a $10,000 fine.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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