Firm Settles FINRA Supervisory Violations for Unsuitable and Excessive Trading

A firm and its General Securities Principal settled FINRA charges for supervisory violations regarding suitability and excessive trading.

In a Letter of Acceptance, Waiver and Consent, FINRA found that the firm and its principal failed to establish and maintain a supervisory system reasonably designed to achieve compliance with FINRA Rule 2111 ("Suitability"), including detecting and reviewing for unsuitable and excessive trading done by a former registered representative in two customer accounts. During the relevant period, the firm had no procedures for (i) "establishing thresholds for annualized turnover rates and cost-to-equity ratios," (ii) providing set standards for identifying and investigating possible excessive trading, or (iii) determining under what circumstances should the firm’s principal notify customers to assess "whether trading in their accounts was acceptable."

In addition, FINRA found that the firm and its principal knew but failed to respond to the red flags on excessive trading. In two customer accounts, there were "annualized turnover rates from 6.49 to 6.78 and cost-to-equity ratios ranging from 20.68% to 24.46%." The customers paid $35,223.82 collectively in commissions as a result of the former registered representative’s unsuitable and excessive trading.

As a result, FINRA concluded that the firm and the principal violated FINRA Rules 3110(a) and (b) ("Supervision"), and 2010 ("Standards of Commercial Honor and Principles of Trade").

To settle the charges, the firm agreed to (i) a censure, (ii) a $25,000 fine, and (iii) restitution in the amount of $35,223.82 plus interest. The firm’s principal agreed to (i) a three-month suspension, (ii) a $7,500 fine, and (iii) an undertaking to complete 20 hours of continuing education.