For the last eight years, I’ve had the chance to work in both the world of high finance and the often-complex realm of regulatory law. I uncovered that First Horizon Advisors Inc., a financial firm based out of Memphis, is in the spotlight for regulatory scrutiny. Based on a press release by the Securities and Exchange Commission (SEC) on September 18, 2024, it turns out First Horizon has been charged with Regulation Best Interest (Reg BI) violations related to structured notes.
What is the Allegation about?
As an experienced financial analyst and legal expert, I understand the severity of these allegations. Structured notes, a derivative security, are complex financial instruments, and First Horizon’s recommendations around these products have come under regulatory scrutiny.
Following their 2021 merger, there seems to have been a system glitch, which resulted in First Horizon being unable to generate accurate customer data to check structured note transactions correctly. Complicating matters further, firm representatives allegedly didn’t have access to the necessary compliance tools either. Consequently, in 2023, the firm was said to have greenlit structured note recommendations without the required paperwork.
The SEC hasn’t taken kindly to this apparent oversight, understandably so. With the firm now agreeing to pay a hefty $325,000 civil monetary penalty and accept a cease-and-desist order, the allegations against them can’t be brushed aside.
First Horizon Advisors: The Backstory
First Horizon, a national heavyweight in the financial arena, manages an impressive $12.4 billion and employs 239 across the country. But with this financial heft and reputation comes an equally substantial responsibility. I’ve learned over the years that interest is the key to safeguarding investor interests.
It’s not the company’s first hiccup either. The firm has had a checkered history fraught with various complaints, painting a troubling picture. The Financial Industry Regulatory Authority (FINRA) might give potential investors some pause.
Decoding REG BI and Structured Notes
Sticking to the truth and keeping the interest of retail investors at heart, let me break down what Regulation Best Interest (Reg BI) and structured notes mean.
In simple terms, Reg BI demands that broker-dealers have written procedures in place that align with the regulation. But merely having these procedures isn’t enough. Firms, like First Horizon, must enforce these policies proactively, especially when dealing with complex financial products like structured notes, where there is substantial investment risk for retail investors.
What are structured notes, you may ask? They are effectively IOUs from investment banks, baring investors to one or many other investments through derivatives. Although it can provide retail investors access to strategies that aren’t ordinarily available to them, the SEC warns that they aren’t suitable for the greater part of investors.
So, What’s the Takeaway Here?
Ultimately, the whole situation brings to mind a quote from Benjamin Franklin: “An investment in knowledge pays the best interest.” Investing without thoroughly understanding the nuances of the financial products recommended is akin to sailing on stormy seas without a compass. It’s crucial to have trust in your financial advisor, but it’s equally important to verify their advice’s wisdom.
Keep in mind that a disconcerting financial fact is that an estimated 7.3% of financial advisors have misconduct records, and not all of them face regulatory penalties. It’s a sobering reminder for retail investors that seeming harmless recommendations from advisors can turn out to be a costly oversight in their investment journey. Therefore, the pursuit of financial knowledge and a healthy amount of skepticism towards seemingly “one-size-fits-all” investment recommendations can be the best insurance investors can give themselves.
In conclusion, First Horizon Advisors’ case with the SEC over REG BI violations relating to structured notes serves as a stark reminder of what can happen when firms don’t rigorously adhere to financial regulations. It’s not just a price to pay for the corporation, but it impacts the everyday investor, who depends on these advisory firms to shepherd their hard-earned money. Remember, it’s your wealth, and it’s your responsibility to protect it.
