Emerson Equity LLC and its Chief Executive Officer, Dominic Julio Baldini, of San Mateo, California, have been sanctioned by Financial Industry Regulatory Authority (FINRA), supported by findings that they failed to supervise stockbrokers’ trading of mutual funds in customer accounts, resulting in unsuitable short-term switching of mutual funds by one of the Emerson Equity stockbrokers between 2015 and 2020. Letter of Acceptance, Waiver, and Consent No. 2020066078202 (December 22, 2021).
According to the AWC, Emerson Equity’s supervision system and written procedures were deficient as they pertained to reviewing short-term mutual fund transactions. Baldini was tasked with creating and enforcing the supervision system at Emerson. Supervisory procedures required Baldini to analyze the sales activity reports and mutual fund purchases for switching and to take disciplinary action against those stockbrokers who failed to comply with the procedures. Baldini was also supposed to supervise exception reports, and the reports were expected to be reviewed daily or monthly. Baldini failed to use the exception reports as they pertained to mutual fund trades.
The AWC states that Baldini was solely responsible for activities concerning manual reviews of trade status reports. But those reports did not contain the information that would show possibly unsuitable mutual fund trading. There was no reference to sales charges, the share class of mutual funds sold or purchased, the source of the funds used for a purchase, and the investor’s profile. There were no standard exception reports used by Emerson Equity and Baldini, precluding them from detecting one of its stockbroker’s excessive charges.
The AWC states that between January of 2015 and June of 2020, the stockbroker caused customers to pay unnecessary sales charges through short-term trades of Class A and Class B mutual fund shares. 667 unsuitable short-term trades were recommended and effected by Baldini. FINRA indicated that 22 customers were affected by his trading. Those customers were required to pay $1,641,929.94 in contingent deferred sales charges. FINRA indicated that Class A and Class B mutual fund shares are not appropriate for short-term trades, given the costs.
The regulator also states that frequent mutual fund switches were made by the stockbroker. This resulted in more commissions and charges to customers.
Emerson Equity and Baldini failed to supervise in violation of FINRA Rules 2010 and 3110. Emerson was censured and fined $60,000.00. Baldini was suspended as principal and fined $5,000.00.