SEC Charges Laidlaw & Co. Reps With Excessive Trading, Violating Reg BI
Copyright Chip Somodevilla, Getty Images Practice Management>Regulation & Compliance SEC Charges Laidlaw & Co. Reps With Excessive Trading, Violating Reg BI The SEC also charged the firm with failing to adhere to policies and procedures designed to catch evidence of excessive trading in client accounts. The SEC settled charges with two Laidlaw & Co. reps that they violated Regulation Best Interest by recommending frequent trades that boosted their commission at the expense of clients.
The commission also accused the firm of failing to enforce policies they had in place to catch these lapses, demanding it pay $822,880 in fines and penalties.
Richard Michalski and Michael Murray entered the industry in 2002 and 2005, respectively, before both joining the New York office of the London-based Laidlaw & Co. in 2010. According to the orders issued against Michalski, Murray and Laidlaw, the two registered reps also violated commission rules before Reg BI became the industry’s law of the land in 2020.
The duo's involved “frequent in-and-out” trades. In one instance, the trading strategy didn’t reflect the customer’s risk tolerance, but this wasn’t the case with all clients.
“As to the other customers, the fact that their investment profiles reflected a higher tolerance for risk and/or active trading did not relieve respondents of their care obligation with respect to the recommendations they made,” the order read.
Therefore, a retail client may prefer “active trading,” but according to Reg BI, the broker/dealer still has to “reasonably believe” that the recommendations they’re making are in the client’s best interest. The SEC found Michalski and Murray falling short on this mandate.
The commission argued the pair went for quick profits based on the trading strategy, but didn’t consider long-term costs for clients. Both the cost-to-equity ratios and annual turnover rates resulting from recommendations made to four particular clients were “all in excess of the thresholds courts have found to be indicative of excessive trading,” according to the SEC.
Also, the SEC claimed Laidlaw had monitoring procedures in place to catch potential violations, but they failed to “reasonably maintain or enforce” those policies. Particularly, rep supervisors were pressed to review, among other things, clients’ turnover rates, cost-to-equity ratios and for instances of in-and-out trading (all of which showed up in the clients of the two accused reps).
Supervisors were encouraged to review account records and even contact customers to get more information, if deemed necessary.
But it wasn’t spelled out how frequently these reviews should happen, nor were there policies that detailed how to check if supervisors were doing so. All six retail customers showed up numerous times in reports tracking trading activity in client accounts, and while supervisors sent warning letters to several of them, the firm didn’t ensure that the “contact was accompanied by an attempt to stop trading in the accounts.”
Laidlaw representatives did not return a request for comment prior to publication.
Though neither the reps or Laidlaw admitted or denied the SEC’s findings, the firm agreed to a censure and cease-and-desist, as well as $547,712.36 in disgorgement, $51,844.22 in prejudgment interest and $223,328 in civil penalties.
Michalski agreed to disgorgement of $88,506, prejudgment interest of $4,260.55 and a civil monetary penalty of $44,253, while Murray acquiesced to $24,414.17 in disgorgement, prejudgment interest totaling $1,143.91 and a civil penalty of $20,000.
Both the SEC and FINRA, which regulates registered reps in the brokerage space, have brought numerous enforcement actions based on Reg BI violations this year. In February, FINRA suspended a separate pair of Laidlaw & Co. reps in the firm’s New York office for excessive trading that alleged violated Reg BI obligations.
Last week, FINRA charged reps in the American arm of a Canadian firm for Reg BI lapses, while in September, the SEC accused five SW Financial reps of violating the rule, several months after FINRA barred the firm. Earlier this year, the SEC released additional guidance to help firms meet the demands of the rule’s care obligations.
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Originally posted on: https://www.wealthmanagement.com/regulation-compliance/sec-charges-laidlaw-co-reps-excessive-trading-violating-reg-bi