Aegis Capital Corp of New York, New York, has been censured and fined $1,050,000.00 by Financial Industry Regulatory Authority (FINRA) based in part on findings that it failed to supervise stockbrokers resulting in unsuitable and excessive trading in customer accounts. Letter of Acceptance Waiver and Consent No. 2016051704305 (November 8, 2021).
According to the AWC, from 2014 to 2018, 350 stockbrokers were employed by Aegis Capital Corp across twenty branch offices. Each office had a branch manager responsible for ensuring written supervisory procedures.
Written supervisory procedures used by Aegis Capital Corp covered trading in customer accounts, and it instructed those branch managers to review stockbrokers’ accounts to identify possible suitability concerns. The AWC states that the branch managers were supposed to conduct reviews of trade blotters daily, but Aegis Capital Corp did not explain how those reviews should be conducted. The managers were not told how to use trade blotters or evaluate customers’ accounts to detect potential excessive and unsuitable trading.
The regulator noted that the supervisory procedures did not define the cost-to-equity ratio or turnover rate. Branch managers were not even required to consider how cost-to-equity ratios or turnover rates could be analyzed to determine stockbrokers’ unsuitable and excessive trading. The managers were not instructed under Aegis Capital Corp’s policies to calculate this information.
The regulator next pointed out that trade blotters Aegis used were not capable of identifying excessive trading because of failing to show the history of trading in an account or how long securities were held. There was no mention of turnover or cost-to-equity ratio on the blotters. There was no mention of margin use even though stockbrokers at Aegis Capital Corp recommended for customers to use margin.
Monthly and semi-annual reviews were also supposed to be conducted by branch managers according to written supervisory procedures at Aegis Capital Corp. Those reviews were intended to identify any stockbrokers’ churning or unsuitable trades in customer accounts. The chief compliance officer was also required to review accounts that contained $5,000.00 in commissions each month and more than twenty transactions. That review was meant for ensuring that stockbrokers’ trades aligned to customers’ objectives for investing. FINRA states that these reviews were not undertaken for the majority of the 2014-2018 period.
FINRA also pointed out that there were no other supervisory tools used by Aegis Capital Corp to detect excessive trading. The securities broker dealer used an exception report through a clearing firm, and that report was supposed to determine possible instances of unsuitable and excessive trading. The reports would be triggered for accounts with an annualized cost-to-equity ratio that exceeded five percent over three consecutive days or for accounts with a turnover of 500 percent for at least five consecutive days.
Between July of 2014 and December of 2018, thousands of exception reports were generated because of the active trading executed by Aegis Capital Corp stockbrokers. The AWC states that 33 percent of the reports pertained to accounts owned by elderly investors. Nine hundred reports pertained to possible unsuitable trades collectively made by Aegis Capital Corp stockbrokers at Aegis’ Wall Street and Melville branches.
Supervisors at Aegis Capital Corp were able to review these exception reports. However, for most of the 2014-2018 period, the exception reports were not noted in the written supervisory procedures. This meant that supervisors were not required to look at exception reports or address red flags.
According to the AWC, unauthorized, unsuitable, and excessive trading was alleged in more than fifty complaints received by Aegis Capital Corp. At least thirteen complaints involved customers whose accounts were traded by stockbrokers at Aegis’ Wall Street and Melville branches.
Aegis Capital Corp did not take adequate steps to address alerts of unsuitable and excessive trades by stockbrokers. Supervisors only sent customers letters that generally confirmed the trades and trading costs. FINRA indicated that those letters concealed actual costs (including costs relating to margin use) or explanations of trades that caused the letters to be sent.
FINRA noted that Aegis Capital Corp’s compliance department admitted that the securities broker dealer did not have procedures in place to review commission-to-equity ratios or turnover rates and was not using alerts from the clearing firm to ensure that commission-to-equity ratios were reasonable. The report showed that Aegis Capital Corp lacked compliance personnel too.
FINRA states that Aegis Capital Corporation’s failure to supervise resulted in thirty-one customers’ accounts being exposed to excessive and unsuitable trading. Customers’ accounts had turnover rates of up to 199.8 and cost-to-equity ratios of up to 164.6 percent, resulting in $4,600,000.00 in losses to customers and $2,900,000.00 in costs.
FINRA determined that Aegis Capital Corp violated FINRA Rules 2010 and 3110.
