FINRA Suspends Brokers for Excessive Trading
Commentary by Steven Lofchie
FINRA suspended two brokers for excessive trading in customer accounts.
According to the first AWC, a broker excessively traded the accounts of a retiree. FINRA found that in the customer’s brokerage account, the broker executed nearly 100 transactions that drove the annualized cost-to-equity ratio to 48 percent, generating more than $76,000 in commissions while causing losses exceeding $86,000. FINRA found that in the customer’s IRA, the broker recommended over 40 transactions that produced a 29 percent cost-to-equity ratio, resulting in more than $15,000 in commissions and additional losses. FINRA concluded that the broker’s trading activity was excessive, unsuitable, and not in the best interest of the customer.
According to the second AWC, a broker excessively traded the accounts of 4 retail customers, generating $365,344 in commissions while causing $262,683 in losses. FINRA found that the trading activity produced turnover rates as high as 35 and cost-to-equity ratios up to 171 percent, well above established benchmarks. In one case, a customer incurred over $67,000 in losses while paying nearly $40,000 in commissions, and in another, a customer lost more than $56,000 while paying over $30,000 in commissions. FINRA concluded that the broker’s recommendations were excessive, quantitatively unsuitable, and not in the best interest of customers.
To settle the charges, the first broker agreed to a three-month suspension from associating with any FINRA member in all capacities, with no monetary sanctions imposed due to demonstrated inability to pay. The second broker agreed to a nine-month suspension, a $10,000 fine, and restitution of $69,830 plus interest.
FINRA determined that in both cases the brokers violated Exchange Act Rule 15l-1 ("Regulation Best Interest") and FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 2111 ("Suitability").
These actions follow a similar enforcement in which FINRA suspended a broker for excessive trading in the accounts of two customers that generated over $150,000 in commissions and caused more than $350,000 in losses. (See previous coverage.)
Commentary
FINRA should re-examine the internal logic of its fine amounts. In today's newsletter, a bank is fined $500,000 for a SAR reporting failure that was unintentional and self-reported.
Excessive trading at the level described in the above enforcement actions is not a close call; it is just a form of theft. Two brokers who essentially stole money from their retail customers are fined, respectively, nothing and $10,000. That sends the wrong message.
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FINRA suspended a broker for recommending excessive trades in the accounts of two retail customers.