New York-based brokerage firm Reid & Rudiger LLC has been expelled by the U.S. Financial Industry Regulatory Authority Inc. (FINRA). The firm’s co-founders have also been banned, for violating Regulation Best Interest (Reg BI) by heavily churning clients’ accounts.
The U.S. industry self-regulatory organization (SRO) ruled that the firm and its co-founders, Edward Rudiger Jr. and Clifford Reid, engaged in excessive trading in at least 20 accounts over nearly six years. FINRA said this cost the clients US$2 million in commissions and other trading costs, and resulted in approximately US$2.7 million in trading losses.
“Both Reid and Rudiger recommended to customers a high-volume, high-cost market-timing strategy that made it virtually impossible for customers to make a profit,” the SRO said in a release issued Wednesday.
According to FINRA’s order, the trading resulted in annualized turnover rates ranging from 6.92 to 17.33, and annualized cost-to-equity ratios ranging from 34.9% to 111.6% — indicating the returns that the accounts would need to generate to break even (34.9% to 111.6%).
The excessive trading violated Reg BI, along with various FINRA rules, the regulator alleged.
Additionally, the SRO alleged that the firm’s majority owner, Marc Harrison, and its chief compliance officer, Kelli Mezzatesta, failed to supervise the excessive trading activity despite various red flags, including the high cost-to-equity ratios. It further alleged that the firm and its CEO, Rudiger, failed to establish a supervisory system designed to detect and prevent churning and excessive trading.
FINRA suspended Harrison and Mezzatesta for three months, fined them US$5,000 each and required them to complete 20 hours of supervision-related continuing education.
The respondents all settled the allegations, and consented to the entry of FINRA’s findings, without admitting or denying them.