According to a FINRA Letter of Acceptance, Waiver and Consent (“AWC”), between about October 2008 and April 2009, registered representatives in two of Lincoln Financial Advisors Corporation (“LFA”) branch offices allegedly recommended that customers invest in a hedge fund offered as a sub-account to a private placement variable annuity (the ”PPVA”). The Hedge Fund engaged in a complex options trading strategy, including trading uncovered options. LFA approved the PPVA and the Hedge Fund, after it was added as a sub-account by the PPVA sponsor, for investment by the LFA’s customers. According to the AWC, based on recommendations of the Firm’s registered representatives, 25 of the Firm’s customers invested a total of approximately $11.7 million in the Hedge Fund. In 2010, the Hedge Fund was shut down.

Although the Hedge Fund allegedly engaged in a complicated options trading strategy that differed significantly from traditional investments and even other alternative investments, LFA also allegedly failed to provide adequate training or guidance to its registered representatives on the trading strategy or risks of the Hedge Fund before they solicited and sold the investments. For example, the Firm did not provide product-specific training regarding the PPVA or the Hedge Fund to its registered representatives. LFA failed to adequately supervise its registered representatives’ customer specific suitability determinations in connection with investments in the Hedge Fund. Although LFA conducted suitability reviews concerning a customer’s initial sub-account allocation, LFA did not conduct a similar review when customers re-allocated their investments in the PPVA to the Hedge Fund. LFA allegedly did not provide sufficient guidance to its registered representatives regarding concentration of customer assets in the Hedge Fund. Although LFA’s written supervisory procedures limited customer investments to no more than 10% of their net worth in a specific alternative investment product, such as the Hedge Fund, LFA did not review investments in the Hedge Fund for compliance with this limit.

LFA failed to have supervisory systems and procedures reasonably designed to achieve compliance by its registered representatives with their suitability obligations in recommending to the 25 customers that they invest in the Hedge Fund. LFA failed to adequately supervise customer specific suitability reviews for investments in the Hedge Fund, including failing to review for overconcentration in alternative investments through PPVA sub-account allocations. In addition, LFA failed to adequately train its registered representatives on the risks of the Hedge Fund. For these reasons FINRA imposed the following sanctions: a censure and a fine in the amount of $150,000.

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