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FINRA Expels Firm for Reg BI Violations

The Financial Industry Regulatory Authority announced 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).

FINRA says this is the second firm expulsion that has included violations of Reg BI. According to BrokerCheck, the firm was established in August 2017.

“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 says 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 SEC rules.

In one instance, a customer’s account had an annualized cost-to-equity ratio of more than 103%, meaning the customer’s account would have had to grow by more than 103% 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%, resulting in a loss of $158,078.

FINRA says 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. According to FINRA, these misrepresentations included a statement that Monmouth monitored customer accounts through daily exception reports, though the firm never utilized such reports.

Monmouth accepted and consented to the entry of FINRA’s findings without admitting or denying them.

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