The Financial Industry Regulatory Authority (FINRA) is ramping up enforcement against registered representatives who violate the Best Interest Obligation of the SEC’s Regulation Best Interest (“Reg. BI”). In February 2023, FINRA announced that it had disciplined two New York-based registered representatives for violating Reg BI. Tony Cirella and Edward Scott Short, both of the Melville, New York, office of Laidlaw & Company, were both charged by FINRA with trading activity that was “excessive, unsuitable, and not in the customer’s best interest.”
According to his Letter of Acceptance, Waiver, and Consent (“AWC”), between June 2020 and January 2021, Mr. Cirella recommended a series of 46 trades to a senior customer. The trades generated $27,566.00 in commission and approximately $12,000.00 in losses for the customer. The annualized cost-to-equity ratio for the account was 37.65%. The cost-to-equity ratio meant the customer’s account would have had to grow by 37% percent annually just to break even, per FINRA. The account had an annualized turnover rate of 20.39. Mr. Cirella was charged with violating Reg. BI and FINRA Rules 2111 and 2010 and consented the following sanctions: a three-month suspension from associating with any FINRA member in all capacities; a $5,000.00 fine; and restitution of $27,566.00, plus interest.
According to Mr. Short’s Letter of AWC, between July 2018 and December 2020, he recommended 204 transactions in his senior customer’s account. The trades generated $116,859.00 in commissions and $185,000.00 in trading losses. The annualized cost-to equity ratio for the account was 76.53%. The account also had a turnover rate of 47.79. Mr. Short was charged with willfully violating Reg. BI and FINRA Rules 2111 and 2010 and consented to the following sanctions: a seventh-month suspension from associating with any FINRA member in all capacities; a $5,000.00 fine; and restitution of $116,859.00 plus interest.
Broker-dealers and their associated persons are required to comply with Reg. BI as of June 30, 2020. According to FINRA, Reg. BI’s Best Interest Obligation requires a “broker, dealer, or a natural person associated with a broker or dealer, when making a recommendation of any securities transaction or investment strategy … to a retail customer, to act in the best interest of the customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or associated persona ahead of the interest of the retail customer.” Associated persons need to understand that enforcement of Reg. BI is becoming a priority for FINRA.