Initiated By
FINRA
Allegations
Stuart was named a respondent in a FINRA complaint alleging that he failed to establish, maintain, and enforce a supervisory system, including WSPs, that was reasonably designed to achieve compliance with the Care Obligation of Rule 15l-1 of the Securities Exchange Act of 1934 (Reg BI) and FINRA Rule 2111, as they pertain to excessive trading. The complaint alleges that Stuart was responsible for establishing and maintaining his member firm's WSPs, which did not describe how the firm should identify or respond to red flags of possible excessive trading and did not address Reg BI at all following its effective date. Stuart also failed to reasonably supervise trading in customer accounts. Stuart did not review alerts received by his firm showing that the accounts had be charged high commissions equaling at least 30 percent of their value, and he did not otherwise take any steps to determine whether frequent and high-cost trades in the accounts were consistent with the customers' investment profiles. In addition, Stuart failed to identify or respond reasonably to red flags of possible excessive trading in the customers' accounts. In fact, the trading recommended in the accounts resulted in cost-to-equity ratios of approximately 30 percent and total costs of approximately $236,500 and $22,000 for each account, respectively. The complaint also alleges that Stuart failed to appear for on-the-record testimony that FINRA requested as part of its investigation into his supervision of a registered representative. Stuart initially appeared for on-the-record testimony but during the course of that testimony and before the testimony was complete, he requested that the testimony be adjourned. FINRA agreed to adjourn the remainder of the testimony to a later date and issued subsequent requests for Stuart to appear again to complete his testimony. However, Stuart failed to appear to complete his testimony.
Resolution
Decision
Bar
Bar (Permanent)
Registration Capacities Affected
All capacities
Duration
Indefinite
Start Date
4/9/2024
Regulator Statement
Default decision rendered March 15, 2024 wherein Stuart was barred from association with any FINRA member in all capacities. The sanction was based on findings that Stuart failed to establish, maintain, and enforce WSPs reasonably designed to achieve compliance with FINRA Rule 2111 and the Care Obligation of Rule 15l-1 of the Securities Exchange Act of 1934 (Reg B). The findings stated that Stuart established and maintained his member firm's WSPs and was responsible for reviewing and testing the WSPs on at least an annual basis. The WSPs were deficient in several respects. First, the firm's WSPs recognized that factors such as the turnover rate and cost-to-equity ratio could provide a basis for finding that activity in a customer account was excessive, but the WSPs did not provide any guidance on how to calculate these ratios or identify what ratio levels suggested excessive trading. Second, the WSPs required the firm's Compliance Department to review active accounts on a quarterly basis, but they did not describe what steps the firm should take to supervise trades recommended in such accounts. Third, the WSPs did not identify alerts the firm received from its clearing firm that were relevant to identify potential excessive trading, including turnover alerts that identified accounts in which the account turnover exceeded certain percentage thresholds, and a commission velocity alert that identified accounts in which commissions charged over the preceding 90 days exceeded certain percentage thresholds. Finally, after Reg BI went into effect, Stuart failed to update the WSPs to address this new rule. As a result, the WSPs did not explain how the firm or its registered representatives should determine whether recommended trades might improperly place the firm's interest ahead of the customer's interest, such as identifying what cost-to-equity ratio or turnover rate suggested excessive trading. The WSPs did not provide guidance on how the firm or its registered representatives should consider reasonably available investment alternatives in determining whether to recommend a transaction or series of transactions. The findings also stated that Stuart failed to reasonably supervise trading in customer accounts. Stuart failed to detect and investigate red flags of potential excessive trading in the accounts of two firm customers, one of whom was an elderly retiree. The firm received alerts form its clearing firm that identified accounts in which the commission charged over the preceding 90 days exceeded percentage thresholds based on a customer's investment objective and alerts that identified accounts in which the turnover in the account exceeded percentage thresholds based on a customer's investment objective. However, Stuart failed to review these alerts and failed to identify or investigate red flags of possible excessive trading activity in two customer accounts. As a result of this trading, one customer paid $236,500 in total costs, including $220,000 in commissions, and incurred losses of $368,159 and the other paid an extra $14,647 in commissions and incurred total costs of $22,350 and losses of $1,766. The findings also included that Stuart failed to complete on-the-record testimony requested by FINRA. After initially appearing for testimony, Stuart complained that he was lightheaded and groggy and ultimately FINRA adjourned the testimony to a future date. FINRA made multiple attempts to schedule for continuation, however Stuart never appeared to continue the testimony. Stuart's failure to appear impeded FINRA's investigation and deprived it of material information.
If no further action is taken the decision will become final April 9, 2024.
