FINRA Sanctions Laidlaw Brokers for violation REG BI in Excessive Trading Case
According to an article this week in Financial Planning, an excessive trading case against two brokers at Laidlaw & Company indicates that regulators are getting serious about the Regulation Best Interest rule or Reg BI.
“Regulation Best Interest,” approved by the SEC in 2019, requires financial advisors to put clients’ interests before their own. Although the rule has been in effect since the beginning of 2020, REG BI enforcement actions are just coming in to play during the past few months.
This week, The Financial Industry Regulatory Authority (FINRA) sanctioned two Laidlaw & Company brokers with the payment of more than $150,000 in restitution and fines after they were found to have violated the Reg BI rule.
Acting in a client’s best interest would require a broker to disclose conflicts of interest and to take into account a client’s total portfolio and exposure to risk when making investment recommendations.
Reg BI is a replacement of an older standard that financial advisors make sure their recommendations were suitable for clients. According to the article, the first two years of Reg BI’s existence saw very little in the way of enforcement actions as regulators giving firms time to come to terms with the new law.
According to FINRA, one of the Laidlaw brokers purportedly made 204 transactions for a 77-year-old client, which generated $116,859 in commissions, but also led to $185,000 in trading losses, as well as an annualized cost-to-equity ratio of 76.53% and an annualized turnover rate of 47.49.
According to FINRA, “This level of trading was excessive, unsuitable, and not in the customer’s best interest.”
The other Laidlaw broker, during a seven-month time frame, allegedly recommended 46 trades for a 60-year-old client, generating $27,566 in commissions but also leading to about $12,000 in trading losses, with an annualized cost-to-equity ratio of 37.65% and as an annualized turnover rate of 20.39. This meant the account would have to grow 37% annually just to break even.
Both brokers reportedly enjoyed de facto control over the client’s account, according to FINRA.
FINRA’s first Reg BI Enforcement Actions
In October FINRA reportedly suspended a Network 1 Financial Securities advisor, who agreed to a $5,000 fine to settle charges that he’d recommended a number of transactions for one client’s accounts that were deemed excessive in light of the customer’s investment profile and in violation of the Regulation Best Interest rule.
The SEC released a Risk Alert on January 30, 2023, highlighting Reg BI deficiencies found while examining brokerage firms, with intentions of helping the firms with better compliance.
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Tags: Advice rule, Laidlaw and co. REG BI, Laidlaw and Company excessive trading, Network 1 Financial Securities advisor, Reg bi, Regulation best interest, SEC, Securities Attorney Last modified: February 8, 2023