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NEWSLETTERS & ALERTS
Supervision: Firm is 'All Thumbs' When It Came to Excessive Trading
By Howard Haykin
From January 2014 through June 2015 (the "Relevant Period"), E.J. Sterling (“EJS”), now known as Allied Millennial Partners, operated without adequate supervisory procedures for detecting and preventing unsuitable excessive trading in customer accounts.
According to testimony by the Firm's then-CCO, the firm relied on a monthly exception report generated by EJS’s clearing firm to detect potentially unsuitable excessive trading. If potential excessive trading was noticed, the CCO would sometimes send an "activity letter" advising the customer of the level of trading in his or her account. The customer then had 30 days to respond to the letter - by signing and returning the letter indicating their understanding of, and consent to, the level of trading in their accounts. The activity letters further advised that if the customer did not return the signed activity, the Firm "may" restrict the account to liquidation transactions. And, if the customer did not respond within 30 days, the CCO would restrict the account to "liquidation transactions only."
That said, the CCO could not articulate when and under what circumstances he would send an activity letter, and the Firm had no procedures or other guidance addressing this issue.
FINRA FINDINGS. During its reviews, FINRA noted the following:
- During the Relevant Period, at least 33 customer accounts may have been excessively traded – exhibiting turnover rates ranging from 20 to 140 and cost-to-equity ratios ranging from 20% to 154%.
- From a sample of 41 accounts for which the Firm sent activity letters to a customer, 21 of the customers failed to return the signed activity letter within 30 days; the Firm failed to place 10 of those 21 accounts on "liquidation only" status.
- Although the SEC specifically cited the Firm in December 2013 for failing to have adequate written procedures addressing the Firm's supervision of actively traded accounts, the Firm did not add any such written procedures until April 2016 - more than 2 years later.
- At least in part as a result of these supervisory failures, the Firm failed to detect excessive trading in certain customer accounts during the Relevant Period.
By virtue of the foregoing, EJS was charged with violating NASD Rule 3010 and FINRA Rules 3110 and 2010.
CONCLUSION. Allied Millennial Partners agreed to pay $35K plus interest in partial restitution to affected customers. FINRA imposed no fine in the interest of maximizing restitution to customers, and in consideration of the firm’s financial resources.
This case was reported in FINRA Disciplinary Actions for June 2018.
For details on either case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2015043310801.