Credit Unions Navigate Broker Scandal

Three companies that provide investment services to members of seven Utah credit unions are facing combined fines of more than $2.2 million for misleading sales and marketing practices, failing to supervise the broker business run through the credit unions, not following or enforcing policies and procedures, and allowing unlicensed employees to provide investment advice to members.

These alleged regulatory violations brought by Utah’s Division of Securities have been flatly denied by the San Diego-based CUSO Financial Services. However, LPL Financial LLC in Boston said it is committed to enhancing its risk management and compliance structures, and is looking forward to proactively working with Utah DOS to resolve this matter. Cetera Advisor Networks LLC in El Segundo, Calif., did not respond to CU Times’ request for comment.

And while credit unions were not fined or cited for violating regulations, Utah DOS pointed out in documents that the credit unions were not in compliance with regulations, guidance and minimal industry standards required for cooperatives to offer onsite brokerage services through networking agreements with their broker-dealers. Credit union CEOs who responded to CU Times’ request for comment denied any wrongdoing, pointing out the investment firms were responsible for compliance. However, one executive said his credit union did not dismiss the DOS’ findings and has taken steps to address them, though he emphasized there was no intention misleading members in any way. What’s more, another credit union CEO said he discontinued the credit union’s relationship with Cetera.

The credit unions were the $10 billion America First Federal Credit Union in Riverdale, the $7.5 billion Mountain America Federal Credit Union in West Jordan, the $915 million Cyprus Federal Credit Union in West Jordan, the $287 million Jordan Federal Credit Union in Sandy, the $447 million Granite Federal Credit Union in Salt Lake City, the $675 million Deseret First Federal Credit Union in West Valley City and the $1.3 billion Utah Community Federal Credit Union in Provo.

The SEC industry standards and regulations center on making sure members fully understand the difference between credit union products that are insured by the NCUA and broker-dealer products, which are not federally insured, and what products are offered through which entity.

Regulations require that broker-dealers must deliver their services in an area that is physically separate from the credit union’s business office. Moreover, all advertising and promotional materials must state that the brokerage services are not being provided by the credit union, that the credit union is not a licensed broker-dealer and that the broker-dealer is not affiliated with the credit union.

In addition, in a 2010 NCUA letter to credit unions, the federal agency emphasized the need to distinguish credit union activities to avoid misleading or confusing credit union members as to the nature or risks of brokerage products, and to ensure that appropriate disclosures are made in writing and in a location and (letter) type size that is clear and conspicuous to credit union members.

Four of the seven Utah credit unions paired the words investing, investment or investment services in their credit union brand names, which gives members the impression that the credit union and its investment services are one in the same and doesn’t disclose that the investment services are offered by a separate company, according to Utah examiners.

Although the brokerage companies are ultimately responsible for complying with all industry standards and regulations, credit unions did play some role that led to regulatory violations, documents filed by Utah examiners show.

For example, a CUSO Financial broker told Utah examiners that the branding of “America First Financial Solutions” was driven by America First. However, CUSO Financial approved the use of the brand name that examiners argue could potentially mislead members.

“AFCU management wanted the investment side of the business to feel like it was part of the credit union, rather than a separate entity where the broker-dealer agency is hanging out in the office but not really part of the credit union,” CUSO Financial Program Manager Ryan Tingey told Utah examiners.

Tingey claimed America First “dictated” the marketing efforts and that he generally piggybacked on what the credit union wanted to do, including making the graphics of America First Financial Solutions similar to the credit union’s to overcome the perceived disconnect between the credit unions and the investment side of the business.

He also told Utah examiners that CUSO Financial “happily kind of play[ed] and [the credit union] can push your brand forward.”

But in its response document, CUSO Financial said it didn’t have sufficient evidence to admit or deny these allegations made by Tingey, but it also denied the allegations to the extent they differed from a transcript of Tingey’s interview.

“CFS states that Mr. Tingey’s responses to certain questions appear to be misrepresented and/or represented without the necessary context of the questions posed to Mr. Tingey or the complete answer provided by Mr. Tingey,” CFS wrote in its response to Utah regulators. “Specifically, CFS sates that Mr. Tingey’s alleged statement that CFS will ‘happily play in the background …’ was in response to a question posed regarding AFCU’s entire suite of services and was intended to indicate that the CFS name and related marketing would not disrupt the non-investment services provided by AFCU. CFS denies any wrongdoing in connection with the allegations.”

In the case involving Mountain America Federal Credit Union, examiners pointed out many of the alleged violations and supervisory failures by LPL Financial were the same violations and failures that led Utah’s Division of Securities in 2007 to slap a stipulation and consent order against the credit union and its prior broker-dealer.

“Through stipulation and consent orders, MACU and the broker-dealer agreed to specific remedial actions going forward, including ceasing the use of a misleading credit union DBA name and changes to communications with the public, marketing, advertising, compensation and oversight by the broker-dealer,” according to Utah DOS documents. “LPL is – or should be – well aware of those requirements and that the terms of the SCOs apply equally to LPL and any other credit union in Utah with which LPL has a networking agreement. LPL however, failed to apply the MACU standards equally to Cyprus and failed to ensure that MACU was also meeting the requirements of SCO.

“Mountain America works diligently to ensure compliance with every applicable law and we believe we have done so in this instance,” Mountain America president/CEO Sterling Nielsen said. “We look forward to a swift and amicable resolution of this matter and have confidence that the facts will show Mountain America is and has been compliant.”

LPL also provides brokerage services to Cyprus. Utah DOS documents also said LPL Financial and Cyprus did not comply with regulations, though Cyprus was not cited for any wrongdoing.

“Our partnership agreement with LPL states that LPL is responsible for ensuring that all aspects of Cyprus’ partnership with LPL are compliant with both state and federal regulations,” said Rachel Langlois, a spokesperson for Cyprus. “Each item mentioned in the Utah Securities Division document was reviewed and approved by LPL for being in compliance with all state and federal regulations.”

And while Mountain America was also not cited for any wrongdoing, Utah examiners nevertheless pointed out the credit union’s internal culture emphasized Mountain America over LPL to portray the credit union as a “one-stop shop for the member to receive traditional credit union services as well as investment advice.”

Utah DOS said there was a “lack of clear separation” in the Mountain America culture between the dual roles of employees in regard to employees performing specific duties for the credit union outside of their broker-dealer responsibilities.

“Significantly, the MACU/LPL individuals interviewed by the (DOS) all disclaimed having any credit union responsibilities despite emphasizing that the credit union rather than LPL was their employer,” according to DOS.

What’s more, Mountain America has licensed branch staff, employees who are licensed with LPL. They typically work on the credit union’s side of business, but they are licensed to assist members with basic investment needs and questions when a designated LPL licensed agent is unavailable.

DOS examiners found that at least one Mountain America employee who was designated and working as a licensed branch employee but was not licensed by LPL. Examiners also determined of the 36 licensed branch employees only 11 were licensed in their state of residence.

Utah examiners also found that Paul W. Neuenswander, a licensed broker-dealer for Cetera, was representing himself as an investment adviser at Granite even though he had never taken the appropriate examination to be licensed as an investment advisor. Granite also promoted investment services on its social media pages but never mentioned Cetera or had Cetera disclosures.

The credit union used the name Granite Investment Services to market broker-dealer services through Neuenswander and Cetera, but Granite is also not a licensed investment advisor, Utah examiners pointed out.

“We’re not discounting what is said in that [DOS] document,” Granite President/CEO Lynn Kuehne said. “We’ve taken steps since this [document] came out to clean up as much as we can with the things that were stated in that [document].”

But Kuehne emphasized there was no intention to misinform any members. After reading the DOS document, however, he conceded how anyone could get the impression that Cetera and the credit union were the same entity.

“It wasn’t our purpose to deceive anybody,” he explained. “I don’t think we can just step away from it and say we don’t have any responsibility to make sure that what they’re [Cetera] reporting to us is correct. We’ve got to do our own due diligence.”

Last summer, Deseret First prominently marketed its investment business to the community by providing lunch for visitors at Brigham Young Historic Park in Salt Lake City. While the credit union posted small disclosure signs that Cetera was offering the investment services, they were not nearly as prominent as the Deseret First “investments” banner. Other promotional materials also did not have Cetera disclosures, according to Utah DOS.

“Based on the nature of the petition [DOS document] and our current review of it, we are not able to comment on the situations listed in the complaint,” Deseret First President/CEO Shane London said. “However, I can validate that as of January 2017, Deseret First FCU changed our wealth management partner and is no longer with Cetera.”