US Securities and Exchange Commission Warns Investors About Excessive Trading

The Broker-Dealer Task Force and Office of Investor Education of the Securities and Exchange Commission (SEC) issued an Investor Alert on January 9, 2017, which discussed how investors can detect when brokers effect excessive trades in their brokerage accounts. The SEC also detailed how investors could respond when notified by brokerage firms regarding substantial trading activity.
According to the SEC Investor Alert, investors should turn to their online accounts, trading confirmations, and statements to become apprised of conduct demonstrative of excessive trading. The Investor Alert indicated that investors should be on the lookout for transactions which have been effected in their accounts without their authorization. Frequent sales and purchases of securities should be reviewed closely, as there may be occasions in which these trades do not sync up with the risk tolerance and investment objectives which investors have relayed to their brokerage firm. The Alert further stated that investors should be cognizant of the total fees charged in their accounts, and should raise the red flag when fees appear to be high.
The SEC Investor Alert additionally warned investors of churning, which the SEC described as the broker’s illegal practice of purchasing and selling securities on an excessive basis in investors’ accounts with the primary intent to accumulate commissions from investors, and in which the broker’s trading activities take place irrespective of the goals set forth by investors.
Moreover, the SEC Investor Alert detailed that when investors are notified by their brokerage firm regarding high volume trading, they should prompt their brokerage for additional information, including: the return which the investors would have to produce in order to offset the fees assessed in their accounts; the costs associated with high-volume trading, in addition to fees and commissions charged in the investors’ accounts over specified periods; and the purpose behind the strategy and activities effected by the broker in furtherance of the investors’ stated goals.
The SEC Investor Alert also conveyed an example of an enforcement action taken by the SEC against a broker for excessively trading in customers’ investment accounts. Particularly, Paul. T. Lebel, an investment adviser and stockbroker formerly with LPL Financial, was permanently barred by the SEC from acting as an investment advisor or broker, or assisting firms advising the public or selling securities, according to an SEC Order which contained findings that Lebel engaged in the fraudulent churning of customer accounts. In the Matter of Paul T. Lebel, Administrative Proceeding No. 3-17629 (Oct. 18, 2016).
According to the SEC Order, from August of 2008 to August of 2014, Lebel effected mutual fund trades in the customers’ accounts on an excessive basis. The trading which Lebel engaged in reportedly caused investors to suffer from substantial fees, and failed to conform with the investment objectives set forth by the customers. The SEC Order stated that Lebel acted without any regard to the interests of the customers during his trading scheme, which led Lebel to accumulate nearly $50,037.00 in commissions. The SEC found that Lebel’s conduct was violative of Securities Exchange Act of 1934 Section 10(b), Rule 10b-5, and Securities Act of 1933 Section 17(a)(1) and 17(a)(3).
The SEC Invcstor Alert also provided the example of Donald J. Fowlerand Gregory T. Dean whom also had been charged by the Securities and Exchange Commission (SEC) for excessively trading and fraudulently churning customer accounts, and effecting unsuitable investment strategy recommendations. Securities and Exchange Commission v. Gregory T. Dean et al., No. 1:17-cv-00139 (Jan 9. 2017).