A small Texas-based brokerage firm is the latest registrant to settle FINRA charges for violating the SEC’s Regulation Best Interest obligations. It’s the second such case this week and the latest example in the accelerating trend of FINRA Reg BI enforcement actions.
Murray Securities is based out of Tyler, Tx., employs three registered reps and works with retail clients, according to the firm’s settlement letter. Beginning on June 30, 2020 (when Reg BI reached its implementation date), the firm failed to put policies and procedures in place that complied with Reg BI, according to the settlement.
The settlement springs from a FINRA examination of the firm.
Though the firm updated its procedures in Oct. 2021, the policies only discussed the SEC’s rule “in general terms,” according to FINRA. Notably, the revised policies didn’t address Reg BI’s obligations on conflicts of interest or care for clients.
“For example, as to the Care Obligation, the policies and procedures do not call for registered representatives to consider costs or reasonably available alternatives when making recommendations to retail customers,” the settlement letter read.
Murray also didn’t have written procedures to comply with Reg BI and didn’t clarify how the rep responsible for the firm’s compliance should supervise other employees, including how frequently those reviews occur and how they should be done, according to the settlement.
Additionally, the firm omitted mandatory information from its Form CRS, which the SEC requires registrants deliver to clients.
The firm’s initial version of the form didn’t include a required topic on its legal and disciplinary history, and even after the firm updated its form in late 2021, it failed to include a mandatory statement suggesting clients ask about conflicts, according to FINRA. Until then, Murray Securities’ compliance procedures didn’t contain any references to Form CRS.
Though the firm has updated them, they still don’t detail how compliance reps should oversee their co-workers to ensure they’re meeting compliance. The firm did not return a request for comment as of press time.
The firm didn’t admit or deny the findings but agreed to a censure, a $35,000 fine and to update its supervisory procedures within 60 days.
Earlier this week, FINRA suspended Robert Gleason, Jr. for three months for “willfully” violating Reg BI. Gleason was an affiliated rep with Cantella & Co. until Dec. 2021, when Cantella filed a termination notice claiming concerns over “the origin of notations” added to certain client letters.
In Feb. 2022, Gleason joined IFP Securities, according to his BrokerCheck profile. However, that firm let him go because his “trading practices exceed (the) firm’s risk appetite,” according to the FINRA settlement.
In 2020 and 2021, Gleason recommended an excessive series of securities transactions for an unnamed retail customer that “placed his interests ahead of the customer,” according to FINRA. The client was in her early sixties, with an estimated income of $50,000 and a liquid net worth of $700,000.
Gleason pulled the trigger on 91 trades in her account with a total cost-to-equity ratio of more than 28% (meaning the client’s account would have had to grow more than that amount within the year just to break even). Gleason agreed to a three-month suspension and a $5,000 fine to settle the charges. Gleason could not be reached for comment as of press time.
Despite Reg BI’s relatively new addition to the regulatory toolbelt, it’s already among FINRA’s top five enforcement issues in terms of fines, according to a study by the law firm Eversheds Sutherland.
In the aftermath of Reg BI’s 2020 implementation, FINRA brought its first case related to the SEC’s rule in 2022, suspending a former rep with Network 1 Financial Securities over alleged conduct similar to their accusations against Gleason (it followed the commission’s first Reg BI- related action by several months).
Earlier this year, LPL Financial agreed to pay more than $5.5 million in fines and more than $500,000 to settle FINRA charges it didn’t comply with Reg BI when reps recommended certain trades.
Reg BI cases brought in the fourth-highest amount of fines in 2023 (though the mammoth LPL fine accounted for most of this), according to the Eversheds Sutherland report. In all, FINRA reported 15 Reg BI cases in 2023.
Adam Pollet, a partner at Eversheds Sutherland and a co-author of the report, told WealthManagement.com that while the SEC will often bring initial cases under its newest rules or regulations (or more significant cases), FINRA will take the lead as Reg BI becomes a part of everyday regulatory oversight.
“Given the rise in FINRA disciplinary actions relating to Reg BI in 2023, I think it’s fair to say that FINRA has already established itself as the primary regulator for Reg BI going forward,” he said.