Close Close
ThinkAdvisor
SEC headquarters building in Washington

Regulation and Compliance > Federal Regulation > SEC

SEC Fines Two Brokers for Reg BI Violations

By Melanie Waddell

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • The two brokers violated the quantitative prong of Reg BI's care obligation, the SEC said.
  • The brokers' transactions placed their financial interest ahead of the customers.
  • The strategy involved frequent in-and-out trades.

The Securities and Exchange Commission has charged two Laidlaw brokers with violating Regulation Best Interest’s care obligation through a series of recommendations to four retail customers.

The recommendations, according to the SEC order, were made by brokers Richard Michalski and Michael Murray without a reasonable basis to believe that the transactions “were not excessive when taken together in light of the retail customer’s investment profile, and because the series of recommended transactions placed the financial interest of the registered representatives ahead of the interest of the retail customer,” therefore violating the “quantitative prong” of Reg BI’s care obligation.

Laidlaw has been registered with the SEC as a broker-dealer since July 26, 2002. It is owned by Laidlaw Holding PLC, and is affiliated with Laidlaw Wealth Management, an investment advisor registered with the commission.

The SEC ordered Laidlaw to pay disgorgement of $547,712.36, prejudgment interest of $51,844.22 and civil penalties of $223,328, for a total of $822,884.58, to the SEC for failing to supervise the reps.

Michalski and Murray were both censured.

Michalski, 46, who resides in New York, was suspended from association with any broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization for six months. He was also ordered to pay a civil money penalty of $44,253 to the SEC.

Murray, 40, who also resides in New York, was ordered to pay disgorgement of $88,506 and prejudgment interest of $4,260.55, for a total of $92,766.55, to the SEC.

He was also ordered to pay disgorgement of $24,414.17 and prejudgment interest of $1,143.91, for a total of $25,558.08, as well as a $20,000 civil money penalty.

Order Details

Michalski has been associated with various broker-dealers since 2002, and with Laidlaw since October 2010. He currently holds Series 7 and 63 licenses.

Murray has been associated with various broker-dealers since 2005, and with Laidlaw since October 2010. He currently holds Series 7 and 63 licenses.

Between July 2020 through October 2021, the two brokers recommended an investment strategy to certain retail customers that was not in their best interest, the order states.

“The strategy involved frequent in-and-out trades that placed the broker’s interest in generating commissions and fees ahead of the customers’ interest in making a profit,” the SEC said.

“With respect to one customer, the trading also was excessive in light of the customer’s investment profile. 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 SEC order states.

For instance, three of these retail customers indicated a “high” risk tolerance and an investment objective of “speculation” on their account opening documents, the order states.

“The accounts of these three retail customers had turnover rates ranging from 7.9 to 8.87 and cost-to-equity ratios ranging from 20.38% to 24.18% per account, requiring returns above that percentage in order to yield gains for the customer sufficient to cover the costs of the trading,” the order explains.

Notwithstanding the higher risk tolerance and speculative investment objectives of these retail customers, the recommended “in-and-out trading strategy” violated Reg BI because the strategy resulted in excessive trading that placed the brokers’ “financial or other interest … ahead of the interest of the retail customer,” according to the order.

The trading in those three accounts during the Reg BI period generated approximately $177,895 in commissions and fees, with approximately $98,693 of that paid to Laidlaw, $54,788 to Michalski and $24,414 to Murray.

“Two customers suffered losses, and one customer had gains, but the commissions were higher than the gains — that customer made $5,638.80 in net profits, but paid $81,830.46 in commissions and fees,” the SEC order said.

Melanie Waddell

@Think_MelanieW

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.