Broker-Dealer Settles Charges for Reg BI Violations and Excessive Trading
A broker-dealer settled FINRA charges for Regulation Best Interest ("Reg BI") duty of care violations and additional supervisory deficiencies which failed to prevent excessive trading in five customer accounts.
According to the AWC, the firm did not have an effective excessive trading report alert system nor did it enforce a supervisory system capable of monitoring for excessive trading. FINRA said "when the firm's compliance staff reviewed excessive trade alerts, they frequently closed them without conducting further investigation into whether the trading was consistent with the customer's best interest." FINRA explained that the Reg BI duty of care obligation "requires member firms and associated persons to have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer." FINRA noted that two of the affected customers were elderly, raising concerns of heightened vulnerability. As a result of these failings, FINRA stated that the five customers paid more than $2.2 million in total trading costs and incurred realized losses totaling approximately $2.2 million."
FINRA also found that the firm "provided no guidance to supervisors regarding what factors might suggest that a representative was excessively trading an account or what steps they should take if they identified potential excessive trading." In addition, FINRA found that the firm was slow to respond to FINRA's requests for documents, providing incomplete information for nearly two years.
FINRA concluded that the broker-dealer violated Exchange Act Rule 15l-1 ("Regulation Best Interest") and FINRA Rules 8210 ("Provision of Information and Testimony and Inspection and Copying of Books"), 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision").
To resolve the matter, the broker-dealer agreed to (i) a censure, (ii) pay a $500,000 fine and (iii) certify that its supervisory system has been improved.