Firm Violated Reg BI, Excessively Traded, and Churned Numerous Customer Accounts, Including Those of Gold Star Families
FINRA announced today that it has expelled Monmouth Capital Management for churning and excessively trading customer accounts in violation of Regulation Best Interest (Reg BI), failing to supervise its representatives, and providing false and misleading disclosures to retail customers on its client relationship summary (Form CRS). This is the second firm expulsion that has included violations of Reg BI, to date.
“Monmouth abdicated its responsibility to reasonably supervise its representatives’ trading, resulting in substantial harm to customers, including Gold Star families. The egregiousness of the firm’s sales practice and supervisory violations necessitated expulsion of the firm from FINRA membership,” said Christopher J. Kelly, Senior Vice President and Acting Head of FINRA’s Department of Enforcement.
FINRA found that between August 2020 and February 2023, Monmouth, acting through six representatives, excessively traded 110 accounts, 42 of which were also churned, causing customers to incur approximately $3.9 million in commissions and trading costs and to suffer substantial losses, in violation of the Care Obligation of Reg BI and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
In one instance, a customer’s account had an annualized cost-to-equity ratio of more than 103 percent—meaning the customer’s account would have had to grow by more than 103 percent just to cover commissions and trading costs. In another instance, a customer’s account had an annualized cost-to-equity ratio of more than 72 percent, resulting in a loss of $158,078.
Monmouth failed to take reasonable steps to supervise the trading in these customers’ accounts, despite numerous red flags indicative of churning. For example, one customer’s account appeared on 24 consecutive monthly exception reports that flagged the account for churning. However, no one at Monmouth reviewed any of these 24 reports and thus the firm failed to detect the churning.
Several of the churned or excessively traded accounts were owned by Gold Star Families who had funded their accounts with a military death gratuity payment or a Servicemembers’ Group Life Insurance (SGLI) payment following the death of a family member who had served in the Armed Forces. For example, an account was opened at Monmouth for the benefit of a 13-year-old child and funded by SGLI payments following the death of the child’s father. Although the account had an average monthly equity of approximately $150,000, Monmouth representatives purchased more than $1.9 million in securities in the account over a 20-month period, generating nearly $80,000 in commissions and trading costs.
FINRA also found that between Nov. 9, 2020, and Feb. 28, 2023, Monmouth made false and misleading statements on its Form CRS. These misrepresentations included a statement that Monmouth monitored customer accounts through daily exception reports, though the firm never utilized such reports.
This matter originated from a customer complaint made to FINRA concerning a former Monmouth registered representative.
In settling these matters, Monmouth accepted and consented to the entry of FINRA’s findings without admitting or denying them.
FINRA offers resources to help investors better understand areas of risk. These include an Investor Insights article, “3 Ways to Guard Against Excessive Trading in Your Brokerage Account” as well as a FINRA Unscripted podcast, “Excessive Trading: When A Lot Becomes Too Much.” More information about Reg BI and Form CRS are available here.
About FINRA
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.
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