The Securities and Exchange Commission charged registered broker/dealer First Horizon Advisors. with a Regulation Best Interest violation related to the firm’s recommendations of a type of structured note. (Structured notes are hybrid securities that typically combine both debt and equity instruments to achieve specific goals, such as growth, income or risk management.)
Memphis, Tenn.-based First Horizon agreed to pay a civil penalty of $325,000 to resolve the SEC’s charges.
The issue is that, in 2021, via a merger with broker/dealer Iberia Financial Services, First Horizon migrated more than 5,000 customer brokerage accounts to its system. But because of incompatibilities in the two systems, the b/d “did not have accurate customer information necessary to review structured note recommendations for compliance with First Horizon’s Reg BI policies and procedures,” according to the SEC.
During this time, First Horizon’s Reg BI policies required its principal review desk to assess structured note recommendations to help ensure that the transactions complied.
“First Horizon was aware several months prior to the integration that certain customer investment profile information would not map properly from the merging broker/dealer’s clearing firm to First Horizon’s clearing firm because of differing profile fields and that certain other information would not transfer at all,” according to the SEC.
In addition, the advisors who joined First Horizon from Iberia “did not have access to First Horizon’s exception reporting site to review structured notes transactions flagged as non-compliant.”
The SEC investigation also found that for the three years after the implementation of Reg BI in July 2020, First Horizon “did not maintain or enforce certain Reg BI policies and procedures applicable to structured note recommendations made by its new First Horizon and legacy First Horizon registered representatives.”
The SEC further found that in 2023, Horizon approved structured note recommendations without all the documentation required by its Reg BI policies and procedures.
“To help reduce the chance of retail customer harm, Reg BI requires broker/dealers to establish, maintain and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI as a whole,” Osman Nawaz, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said in a statement. “This action underscores that broker/dealers must ensure appropriate compliance around complex financial products and that it is not enough to simply have written policies; firms must also enforce them.”
The SEC’s order finds that First Horizon violated Reg BI’s Compliance Obligation. Without admitting or denying the SEC’s findings, First Horizon agreed to a cease-and-desist order, a censure and a fine.
According to its most recent Form ADV, First Horizon managed total discretionary assets of $8.5 billion as of December 2022. Total assets managed on a non-discretionary basis were $2.8 billion.
First Horizon Advisors Inc. is the successor to First Tennessee Advisory Services. FTAS was organized in 2007 as a wholly owned subsidiary of First Tennessee Bank National Association, now known as First Horizon Bank. In 2013, FTAS merged with and into its affiliated broker/dealer, First Tennessee Brokerage, and the combined entity was renamed FTB Advisors. In October 2019, FTB Advisors changed its name to First Horizon Advisors Inc.
Sponsors have striven to make structured notes more accessible to retail investors in recent years.
Earlier this year, Luma Financial, which specializes in the product, broadened its existing partnership with the private market investing platform Yieldstreet with a goal of expanding advisor access to the alternative product.
Chicago-based Halo Investing runs a platform where advisors can monitor, analyze and invest in structured notes, market-linked CDs, buffered ETFs and annuities offered by financial institutions. The platform includes a multimanager structured note separately managed account marketplace that provides advisors with access to institutional asset managers specializing in defined-outcome portfolio strategies.
In 2022, Morningstar incorporated information from Luma into its Advisor Workstation.
