FINRA Suspends Branch Manager for Failure to Stop Excessive Trading
Commentary by Steven Lofchie
A broker-dealer's former regional branch manager was suspended and fined for failing to supervise registered representatives who churned and excessively traded customer accounts.
According to the settlement Order, the broker-dealer's representatives excessively traded 114 customer accounts - including 53 belonging to senior customers - which generated nearly $10 million in trading costs and caused about $8 million in investment losses. FINRA found that thirty-five of those accounts were churned and concluded that the broker-dealer built its business around this misconduct; FINRA found that over $46 million - nearly two-thirds of its trading revenue - came from more than 1,200 accounts that showed clear signs of excessive trading.
FINRA stated that as Regional Branch Manager, Head of Retail, and Trading Supervisor of the firm's New York City office, the respondent had direct responsibility for overseeing the representatives who carried out the misconduct. FINRA found that he reviewed daily trade blotters and monthly exception reports that repeatedly flagged the same accounts and representatives for excessive activity. FINRA highlighted that it had previously identified widespread excessive trading and supervisory failures at the firm, but the respondent took no meaningful steps to investigate or stop the activity, and, in one instance, allowed a broker to continue churning customer accounts until days before that broker was formally barred by FINRA.
FINRA found violations of FINRA Rule 3110 ("Supervision") and FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").
FINRA suspended the Branch Manager for 18 months from associating with any FINRA member in all principal capacities, and imposed a $15,000 fine, payable upon re-association with a member firm.
Commentary
This enforcement action draws a distinction between "churning" and "excessive trading," although it does not define where the line between the very similar violations lies. "Excessive trading" is described as a violation of FINRA Rule 2111 ("Suitability"), while churning constitutes both a violation of Rule 2111 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder - meaning churning rises to the level of a violation of law, not merely a violation of a FINRA rule.
As to punishment in this case, the penalty imposed on the individual appears unduly low. As the supervisor responsible for overseeing the representatives who carried out the misconduct, he effectively permitted the theft of approximately $18 million from 114 retail customers - nearly $10 million in trading commissions and roughly $8 million in realized investment losses. For that misconduct, the individual receives an 18-month suspension and a $15,000 fine - one that is payable only if he seeks to return to the industry. That outcome seems a disproportionately light consequence for an individual found to have violated the law and whose supervisory failures contributed to $18 million in harm to retail customers.
There is a need for a recalibration of penalties against individuals who rip off retail customers not able to fend for themselves. This does not mean going after close calls. It does not mean heavily penalizing, or disproportionately penalizing, firms or individuals for technical violations that do no harm. But hitting a supervisor that let retail investors get slammed for $18 million, which the firm probably does not have resources to repay, get hit (or "touched" would probably be a better word), with a $15,000 fine that is contingent on his rejoining the industry simply fails to convey a message. (See also, FINRA Charges Firm and CEO for Facilitating Excessive Trading with commentary.)