SEC orders brokerage, two reps to pay $1 million for Reg BI violations

'The strategy involved frequent in-and-out trades that placed the broker’s interest in generating commissions and fees ahead of the customers’ interest in making a profit,' the SEC order states.

A brokerage and two of its registered representatives agreed to pay the SEC a little more than $1 million for violating Reg BI by churning client accounts, according to orders released Monday.

The Securities and Exchange Commission charged Richard Michalski and Michael Murray, two reps for Laidlaw & Co., with recommending an investment strategy to six retail customers from July 2020 through October 2021 that resulted in excessive trading. The SEC said the two failed to comply with the Regulation Best Interest care obligation because the strategy did more to generate revenue for them than returns for the customer. They also failed to consider whether the strategy was appropriate given the customers’ appetite for risk and investment objectives.

“The strategy involved frequent in-and-out trades that placed the broker’s interest in generating commissions and fees ahead of the customers’ interest in making a profit,” the SEC states in the order. “With respect to one customer, the trading also was excessive in light of the customer’s investment profile. As to the other customers, the fact that their investment profiles reflected a higher tolerance for risk and/or active trading did not relieve respondents of their care obligation with respect to the recommendations they made.”

The SEC charged Laidlaw with failing to implement policies and procedures to supervise its brokers to ensure compliance with Reg BI, according to a separate order. It also made similar charges against Laidlaw for a “pre-Reg BI period” from December 2016 through December 2018, when similar excessive trading occurred.

Michalski agreed to pay $137,289 in disgorgement, prejudgment interest and a civil penalty. Murray agreed to pay $40,558. The firm must pay $822,884 in disgorgement and penalties.

A spokesperson for Laidlaw was not immediately available for comment. Laidlaw is based in London. Michalski and Murray worked out of the firm’s New York City branch.

Reg BI, the broker standard of conduct, went into force in June 2020. Under the regulation, brokers cannot put their interests ahead of their customers’ interests when recommending investment products or strategies. After a transition period of a couple of years, the SEC has been stepping up enforcement of Reg BI.