FINRA Issues First Reg BI Enforcement Action

October 14, 2022 — FINRA has issued a $5,000 fine and six-month suspension against a former registered representative for “recommending a series of transactions in the account of one retail customer that was excessive in light of the customer’s investment profile and therefore not in the customer’s best interest.”

FINRA found that between July 2020 and November 2021, the former broker recommended to one customer “a series of transactions that was excessive in light of that customer’s investment profile.” He recommended the customer, a 63-year-old with approximately $100,000 in annual income and approximately a $50,000 liquid net worth, make more than 350 trades in his account during this time. The trades cost the customer more than $54,000 in commissions and costs, while his average account balance during this time was less than $30,000.

The cost-to-equity ratio, a measurement of the amount an account must appreciate just to cover commissions and other costs, is one factor for determining when trading is excessive. Here, the trades recommended by the former broker “resulted in an annualized cost-to-equity ratio exceeding 158 percent – meaning that [the customer’s] account would have had to grow by more than 158 percent annually just to break even.” This caused the customer to lose more than $17,500 during the period, for which the former broker’s firm had to compensate the customer in connection with the settlement of an arbitration claim.