The Financial Industry Regulatory Authority (FINRA) recently sanctioned Securities America, Inc. (Securities America) broker James McLaughlin (McLaughlin) alleging that between October 2010, through October 2012, McLaughlin: (i) engaged in excessive trading (churning) in four customers’ accounts; (ii) recommended unsuitable short-term trading of mutual funds in four customers’ accounts; (iii) engaged in unauthorized trading in three customers’ accounts and; (iv) exercised discretion in one customer’s account without having written authorization.
McLaughlin was registered as a broker from 1989 until October 2012. McLaughlin was registered with Securities America from October 2000, until October 2012. On October 29, 20l2, Securities America terminated McLaughlin’s registrations for violating firm policies and procedures relating to excessive trading.
FINRA alleged that McLaughlin excessively traded at least four customers’ accounts. By analyzing the number of trades, turnover rate, and cost-to-equity ratio for these accounts FINRA determined that across a two-year relevant period from October 2010, through October 2012 that the accounts were excessively traded. In one account 286 purchase and sale transactions occurred resulting in a turnover rate of 47.63 and a cost-to-equity ratio of 228.03%. In a second account 459 purchase and sale transactions occurred resulting in a turnover rate of 15.86 and a cost-to-equity ratio of 69.54%. In a third account FINRA alleged that McLaughlin executed 140 purchase and sale transactions resulting in a turnover rate of 6.79 and a cost-to-equity ratio of 32.74%. Finally, in fourth customer’s account FINRA found McLaughlin executed 111 purchase and sale transactions resulting in a turnover rate of 8.75 and a cost-to-equity ratio of 44.50%.
FINRA also alleged that McLaughlin recommended that customers four customers purchased $167,500 worth of Class A-share mutual funds and then recommended selling them after only an average of 167 days. ln total, FNRA found that McLaughlin recommended that these customers purchase 11 Class A Mutual Fund share positions and then sell them within a year of purchase. FINRA found that the unsuitable recommendations resulted in the four customers collectively paying unnecessary mutual fund fees of $8,375 in upfront fees associated with A-shares and the broker earning over $8,000 in commissions. For instance, had these customers purchased C-shares, the aggregate amount of sales load paid would have been $1,675. In recommending the A-share purchases and sales, FINRA alleged that McLaughlin did not consider the anticipated holding periods of the products at the time of the recommendations. Front-loaded products, like Class A-shares are intended to be held long-term. Thus, FINRA found that McLaughlin had no reasonable basis to believe that the short-term trading of Class A-share mutual funds was suitable for his customers.