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FINRA expels Monmouth Capital Management over Reg BI violations

On Behalf of | Jul 17, 2023 | FINRA Compliance

The Financial Industry Regulatory Authority announced that it has expelled Monmouth Capital Management from the financial industry.

In a news release, FINRA said it took the action against the firm for churning and excessive trading in customer accounts of violation of Regulation Best Interest (Reg BI). The firm also allegedly failed to supervise its representatives, and provided false and misleading disclosures to retail customers on its client relationship summary (Form CRS).

According to FINRA’s letter of acceptance, waiver and consent, six Monmouth registered representatives traded excessively in 110 customer accounts, 42 of which were churned. Their actions resulted in $3,953,492 in commissions and trading costs for clients. Each of the accounts were reported to have suffered substantial losses.

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, FINRA said.

“Monmouth abdicated its responsibility to reasonably supervise its representatives’ trading, resulting in substantial harm to customers, including Gold Star families,” said Christopher J. Kelly, Senior Vice President and Acting Head of FINRA’s Department of Enforcement. “The egregiousness of the firm’s sales practice and supervisory violations necessitated expulsion of the firm from FINRA membership.”

The excessive trading, which occurred between August 2020 and February 2023, was determined to be in violation of the Care Obligation of Reg BI and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. It marked the second firm expulsion to date that has included violations of Reg BI.

The SEC’s Reg BI establishes a “best interest” standard of conduct for broker-dealers when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, requiring that they act in the customer’s best interest.

New Jersey-based Monmouth did not admit or deny the allegations, but accepted and consented to the entry of FINRA’s findings. The authority said the matter resulted from a customer complaint about a former Monmouth representative.

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