Firm Settles Charges for Excessive Trading
Commentary by Glen Barrentine
A firm settled FINRA charges for supervisory failures concerning excessive trading and for violations of FINRA telemarketing rules.
According to the AWC, the firm's supervisory system was not reasonably designed to detect and reasonably respond to potential excessive trading. Specifically, FINRA found that the firm's WSPs did not provide reasonable guidance on how principals should identify or investigate potentially excessive trading and did not require any review of trading over longer periods, which could identify patterns of unsuitable trades over time. FINRA found that these failures led to excessive trading by six registered representatives in 12 customer accounts that caused the customers to pay a total of nearly $640,000 in commissions, costs and margin interest. In addition, FINRA found that the firm's use of exception reports to supervise for excessive trading was not reasonable. FINRA said the firm's WSPs did not identify which reports supervisors should review, with what frequency they should review the reports, how supervisors should access the reports or what activity supervisors should look for in their review of exception reports.
FINRA further found that the firm routinely violated FINRA's telemarketing rules. Among other findings, FINRA said that firm representatives made over 60,000 outbound calls to over 20,000 telephone numbers listed on the national do-not-call registry.
As a result, FINRA found that the firm violated FINRA Rules 3110 ("Supervision"), 2010 ("Standards of Commercial Honor and Principles of Trade") and 3230 ("Telemarketing").
To settle the charges, the firm agreed to (i) a censure, (ii) pay a $300,000 fine, (iii) pay restitution of $594,928 plus interest (iv) and an undertaking to review and revise its WSPs.
Commentary
This matter serves as a reminder of the importance of a firm's WSPs providing specificity with respect to indications of potentially excessive trading. It is not enough to require review of "active" customer accounts without describing the specific activity that might trigger the need for further review. The AWC also underscores the importance, in the suitability context, of reviewing not only daily trades, but taking a longer view to identify patterns of unsuitable trades over time. Finally, the AWC reminds members that cold calling must comply with FINRA’s telemarketing rule (FINRA Rule 3230), which imposes significant and numerous restrictions on that practice.