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Regulation and Compliance > Federal Regulation > FINRA

FINRA Bars Broker Who Lost Customers $3M Through Churning: Enforcement

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The Financial Industry Regulatory Authority barred Edward Beyn, who was previously a registered broker, from association with any FINRA member in all capacities.

Beyn previously worked at Rothschild Lieberman, following stints at two now FINRA-expelled firms, Craig Scott Capital and Brookstone Securities.

According to FINRA’s findings, Beyn churned and excessively traded customer accounts.

“The level of trading demonstrates that Beyn traded the accounts to generate revenue for himself and his member firm,” FINRA states.

The findings also stated that given the costs charged by Beyn and the firm, the accounts had virtually no chance of breaking even, much less realizing any gains for the customers no matter how the underlying investments performed.

While Beyn’s customers experienced total losses of almost $3 million, Beyn earned almost $650,000 from the trading in the accounts, all in the form of markups and markdowns.

Beyn employed the earnings play strategy in trading the customer accounts and effected the transactions in the accounts on a riskless principal basis, charging the customers markups and markdowns rather than commissions.

Beyn chose the investments, including the volume and frequency of the trading, in his customers’ accounts. Meanwhile, the customers — who did not have sufficient investment experience and understanding to make an independent evaluation of his recommendations — routinely followed those recommendations.

The level of trading by Beyn in the customers’ accounts was grossly inconsistent with their investment objectives and financial and personal experiences.

Beyn traded all the accounts the same, regardless of the listed investment objective and the customer’s age or stated financial condition.

The turnover rates and cost-to-equity ratios were outrageously high and demonstrated that Beyn traded the accounts without any regard for the best interest or investment objectives of his customers, according to FINRA.

FINRA Fines Kestra for Overcharging Customers for Fund Purchases

FINRA censured and fined Kestra Investment Services $225,000 for disadvantaging certain retirement plan and charitable organization customers who qualified for, but did not receive, the applicable mutual fund sales charge waiver or appropriate share class.

These sales disadvantaged eligible customers by causing such customers to pay higher fees than they were actually required to pay. Between July 1, 2009, and February 22, 2018, the firm overcharged eligible customers approximately $1.65 million for mutual fund purchases made.

As part of this settlement, the firm agrees to pay restitution to eligible customers, which is estimated to total $1.9 million (i.e. the amount eligible customers were overcharged, inclusive of interest).

According to FINRA, customers that were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge were instead sold Class A shares with a front-end sales charge, or Class B or C shares with back-end sales charges and higher ongoing fees and expenses.

The findings also stated that the firm failed to reasonably supervise the application of sales charge waivers and share class determinations for eligible mutual fund sales. The firm relied on its financial advisors to determine the applicability of sales charge waivers, but failed to maintain reasonably designed written policies or procedures to assist financial advisors in making this determination.

In addition, the firm failed to adequately notify and train its financial advisors regarding the availability of mutual fund sales charge waivers for eligible customers.

SEC Charges Southern California Engineer With Insider Trading

The Securities and Exchange Commission announced insider trading charges against a former engineer at Skyworks Solutions Inc., which designs, manufactures and sells wireless analog semiconductors.

The SEC’s complaint alleges that Yuh-Yue Chen, while working as an engineer at Skyworks in Irvine, traded multiple times in advance of the company’s earnings announcements.

The complaint further alleges that Chen improperly accessed the company’s accounting and finance area, reviewed nonpublic financial reports, and used that information to purchase Skyworks securities in advance of the company’s announcements of financial results for the second and third quarters in 2014.

The SEC charges that after Skyworks announced positive quarterly financial results on April 22, 2014 and again on July 17, 2014, Chen sold Skyworks securities for a total profit of at least $739,959.

The complaint further alleges that in September 2014, Chen fled the country after Skyworks’ security found him loitering in the office restricted area designated for the accounting and finance staff. He recently returned to the United States for a visit at the end of March, when he was interviewed and subsequently served with the SEC’s complaint prior to his planned departure.

The SEC’s complaint seeks a permanent injunction, disgorgement plus interest and penalties.

Firm’s Weekly Email Reviews Were Not Adequate, According to FINRA

FINRA censured and fined a broker-dealer $32,500 for inadequate email reviews.

According to FINRA, Wilson-Davis, which has been a FINRA member since 1968, failed to establish, maintain and enforce a supervisory system, including written supervisory procedures, reasonably designed to review email correspondence for indications of potential violations of federal securities laws or FINRA rules.

The firm conducted weekly reviews of its emails; however, FINRA charges that the firm’s random sampling and lexicon-based reviews were ineffective given the firm’s business, size, structure and customers.

The firm randomly selected 100 emails for review, which FINRA said was not a reasonable amount of the firm’s overall electronic communications. The firm also used 24 search terms that would “flag” an email for review, but FINRA asserts that the search terms did not reflect a meaningful assessment of risk areas and resulted in a large number of false positives.

“Despite the obvious indications that the firm’s lexicon system was not reasonably designed, the firm did not evaluate the efficacy or make any changes to its lexicon system,” FINRA states.

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