FINRA has announced it has expelled Monmouth Capital Management for various violations, including churning, excessive trading, failure to supervise its representatives and providing false and misleading disclosures to retail customers on its client relationship summary (“Form CRS”). During its investigation, FINRA obtained evidence which reflected Monmouth, by way of approximately six (6) registered representatives, excessively traded 110 accounts. 42 of those accounts also exhibited signs of churning. This improper account activity resulted in customers incurring $3.9 million in commissions and trading costs, in addition to suffering significant losses.

In regards to the charge of negligent supervision, FINRA found Monmouth failed to adequately supervise transaction activity in the affected customer’s account. FINRA advised it reviewed one account in particular which appeared on 24 consecutive monthly exception reports. However, the evidence gathered during the investigation revealed that it did not appear anyone at Monmouth had reviewed the activity reports, which should have raised multiple red flags. Similar conduct was noted in relation to FINRA’s finding Monmouth included false and misleading statements on its Form CRS. Specifically, Monmouth represented it monitored customer accounts by reviewing daily exception reports, despite FINRA’s investigation revealing otherwise. FINRA advised some of the customers affected included Gold Star Families who had funded their accounts using monies received pursuant to a military death gratuity payment.

When announcing its decision, FINRA Senior Vice President and Acting Head of FINRA’s Department of Enforcement, Christopher J. Kelly, noted “Monmouth abdicated its responsibility to reasonably supervise its representatives’ trading, resulting in substantial harm to customers, including Gold Star Families.” He went on to explain that the “egregiousness” of the conduct and extent of the violations “necessitated expulsion of the firm from FINRA membership.”

Firms need to make sure they are reviewing their exception reports and taking action when red flags are present.  Documentation of the action taken and reviews done is the best evidence when confronted with an examination.  It shows that the firm is taking its supervision requirements seriously.