FINRA Suspends Broker for Excessive Trading
Commentary by Steven Lofchie
FINRA suspended a broker for recommending excessive trades in the accounts of two retail customers.
According to the AWC, the excessive trading produced turnover rates and cost-to-equity ratios above established benchmarks, resulting in significant customer losses. FINRA explained that "the turnover rate represents the number of times that a portfolio of securities is exchanged for another portfolio of securities."
As to one customer, FINRA found that the broker recommended more than 200 transactions in an elderly customer's account, resulting in an annualized turnover rate of 12 and a cost-to-equity ratio of 25 percent. As to the other customer, FINRA found that the broker recommended 118 transactions producing an annualized turnover rate of six and a cost-to-equity ratio of 28 percent. Together, the two customers generated over $150,000 in commissions while losing over $350,000. FINRA concluded that the level of trading recommended in the customer's account was excessive and unsuitable.
FINRA determined that the broker violated Exchange Act Rule 15l-1 ("Regulation Best Interest") and FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 2111 ("Suitability").
To settle the charges, the broker agreed to (i) a six-month suspension, (ii) a $5,000 fine, and (iii) restitution of $158,500 plus interest.
Commentary
Does the punishment fit the crime? In this case, how is such a level of trading in the account of an elderly person in order to generate commission revenue any different from theft? Why is a $5,000 fine sufficient to punish that theft? Why is the broker not responsible for the customers' full losses?
In many cases, it seems that the regulators over-punish technical violations of complicated rules where no harm is done. Here, there is a clear act of malfeasance, but the punishment is surprisingly light.