SEC Charges Two Brokers with Churning and Excessive Trading

Former brokers, Nate Clay (CRD #4525541) and Terrance Reagan (CRD #2672751) have been charged with violating the Securities and Exchange Act. The Securities and Exchange Commission filed the complaint in the Southern District Court of New York.

SEC alleges that between December 2015 and December 2018, Terrance Reagan and Nate Clay recommended investments that involved frequent buying and selling of securities without reasonably believing that their recommendations were suitable. Reagan and Clay, who were both then associated with a broker-dealer named Laidlaw & Company, generated significant profits from the frequent trading. Further, SEC alleges that Reagan engaged in this conduct from March 2020 to April 2021 while at Arive Capital Markets, a different broker-dealer.

Financial Industry Regulatory Authority (FINRA) Rule Against Churning

A broker typically earns a portion of the commissions or other fees on each purchase or sale of securities that the brokerage firm makes for an investor. When a broker engages in excessive buying and selling (i.e., trading) of securities in a customer’s account without considering the customer’s investment goals and primarily to generate commissions that benefit the broker, the broker may be engaged in an illegal practice known as churning. Churning can result in significant costs for the client, including trading fees, taxes, and potential losses from poor investment decisions.

FINRA Rule 2111, also known as the “Churning Rule,” was created by the Financial Industry Regulatory Authority (FINRA) and prohibits brokers from excessively trading a client’s account to generate commissions or other fees for the broker. The rule requires brokers to have a reasonable basis for believing that the recommended transactions are suitable for the client and that the frequency and costs of the transactions are not excessive. FINRA Rule 2111 also requires brokers to consider the client’s investment objectives, risk tolerance, and financial situation when making investment recommendations. Red flags of excessive trading may include:
• Unauthorized Trading – trades not made by broker without the investor’s consent.
• Frequent Trading – frequent in-and-out purchases and sales of securities inconsistent with client’s goals and risk tolerance.
• Excessive Fees – unreasonably high fees or if one segment of the investor’s portfolio consistently generate high fees.

If a broker engages in churning, they may be subject to disciplinary action by FINRA, including fines, suspension or revocation of their license, and other penalties. Clients who believe they have been the victim of churning may also be able to take legal action against the broker to recover any losses or damages they have suffered.

Did You Lose Money Investing with Terrance Reagan or Nate Clay?