The Financial Industry Regulatory Authority suspended a pair of registered reps for violating the SEC's Regulation Best Interest rule, several months after the agency brought its first penalty against a broker for falling afoul of the standard.
Todd Anthony Cirella is a broker with Laidlaw & Company, a FINRA-registered firm. Cirella’s been in the industry since 1993 and with Laidlaw & Co. since 2004, according to his BrokerCheck profile. Edward Scott Short has been in the industry since 1994 and with Laidlaw since 2012, according to his own BrokerCheck profile; his work history includes a number of firms that FINRA has expelled from the industry, including EKN Financial Services and Tasin & Company.
Both Short and Cirella were based out of the firm’s Melville, N.Y., office, though it also has locations in London, San Francisco, Boca Raton, Fla., and its corporate headquarters in New York.
In Short's case, beginning in 2015, a 77-year old unnamed retail customer opened an account at Laidlaw & Co., with a “high net worth and a speculative investment objective,” according to FINRA. But between July 2018 and December 2020, Short made recommendations for the client and “exercised de facto control” over their account, according to Short’s settlement letter with the regulator.
During that time, Short recommended 204 transactions for the 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.
“The high cost-to-equity ratio meant the customer’s account would have to grow by more than 76 percent annually just to break even,” the letter read. “This level of trading was excessive, unsuitable, and not in the customer’s best interest.”
According to FINRA, there’s no one test to discern whether a trade is excessive, but generally, turnover rates of six or cost-to-equity ratios more than 20% tend to point to excessive recommended trades.
In Cirella's case, starting in 2010, a 60-year old retail customer opened an account at Laidlaw. Beginning in June 2020 through January of the following year, Cirella advised the customer; like Short, he enjoyed de facto control over the client’s account, according to FINRA.
In that seven-month time frame, Cirella allegedly recommended 46 trades for the 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 reps consented to FINRA’s sanctions without denying or admitting the findings, and the agency discovered the violations during a cycle examination of the firm.
Representatives from Laidlaw & Co. did not respond to requests for comment.
To settle, Short agreed to a seven-month suspension, as well as a $5,000 fine and restitution totaling $116,859 plus interest, while Cirella consented to a three-month suspension, his own $5,000 fine and restitution coming to $27,566, in addition to interest.
In October, FINRA suspended a rep in the agency’s first disciplinary action citing Reg BI. Charles Malico, a former rep with Network 1 Financial Securities, also agreed to a $5,000 fine to settle accusations 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 best interest standard.
This action came several months after the SEC filed its first Reg BI-related action. Earlier this week, the commission released a risk alert highlighting Reg BI deficiencies found during exams of broker/dealers, which was intended to help registered b/ds review and enhance their compliance procedures to better adhere to the rule.