In a recent development that underscores the importance of ethical practices in the financial industry, three brokers have been suspended by the Financial Industry Regulatory Authority (FINRA) for violating the best interest obligation under Regulation Best Interest (Reg BI). This case serves as a stark reminder of the consequences of putting personal financial interests ahead of clients’ welfare.
The Violations
The three advisers, who have not been registered with a broker-dealer since 2022, were found to have engaged in excessive trading, also known as “churning,” in client accounts. This practice resulted in inflated costs and commissions totaling a staggering $6.07 million. The misconduct occurred between January 2016 and December 2022 while the brokers were employed at a Long Island-based securities firm.
The Consequences
- Adviser A was suspended for 11 months, marking his second suspension since June. He excessively traded four customers’ accounts, generating $618,911 in total trading costs (including $563,263 in commissions) and causing $735,376 in total realized losses.
- Adviser B adviser received a 17-month suspension, also his second since June. His excessive trading affected six customers’ accounts, resulting in $958,948 in total trading costs (including $849,576 in commissions) and over $1.03 million in total realized losses
- Adviser C was suspended for 17 months. His actions involved excessively trading three customers’ accounts, which led to $1,625,977 in total trading costs (including $1,477,893 in commissions) and $1,101,277 in realized losses.
Reg BI: Protecting Investor Interests
This case highlights the importance of Regulation Best Interest, which went into effect in June 2020. Reg BI prohibits brokerages and registered representatives from prioritizing their financial interests over those of their clients. It also requires the disclosure and mitigation of conflicts of interest.
Industry Implications
The securities firm involved in this case has faced multiple arbitration claims citing churning as one of the allegations. This pattern suggests a potentially systemic issue that extends beyond individual brokers to the firm’s overall practices and oversight.
Key Takeaways for Compliance Officers
This case offers crucial insights for Compliance Officers:
- Enhanced Monitoring: Implement robust systems to detect patterns of excessive trading or churning, particularly in high-commission products.
- Comprehensive Training: Regularly educate all registered representatives on Reg BI obligations and the severe consequences of non-compliance.
- Policy and Procedure Review: Frequently update and reinforce policies related to trade supervision, conflict of interest management, and best interest obligations.
- Technology Utilization: Leverage advanced analytics and surveillance tools to proactively identify unusual trading patterns or potential Reg BI violations.
These takeaways emphasize the critical role Compliance Officers play in preventing misconduct, protecting client interests, and maintaining the firm’s integrity in an evolving regulatory landscape.