Finra dings small Calif. B-D over Reg BI, missing red flags

The Financial Industry Regulatory Authority Inc. on Thursday penalized a small Los Angeles broker-dealer with a censure and a $50,000 in restitution for a variety of shortcomings including violations of Regulation Best Interest, which in 2020 became the standard of conduct for the more than 300,000 brokers and sales people registered with Finra.

From 2018 to 2021, Kayan Securities Inc. and its CEO, Yong Soo Kim, “failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with the suitability requirements” of Finra rules as wells as Reg BI, according to the Finra settlement.

With two offices and 14 registered reps, Kayan Securities over that time also fell short in meeting industry standards in monitoring potential excessive trading, according to Finra. The firm and Kim also failed to respond to red flags that a broker had engage in unauthorized and excessive trading in three clients’ accounts, according to Finra. The firm also failed to give notice to Finra that two customer complaints had been made involving that same broker.

A call to Kayan Securities on Friday was not returned. As part of the settlement, Kim was suspended for two months and fined $5,000, according to the settlement. In the matter, Kayan Securities and Kim accepted Finra’s findings without admission or denial.

Reg BI prohibits brokers from putting their interests, such as maximizing compensation, ahead of their customers’ interests, such as getting the best return on their investments. It was the centerpiece of a package that also included a disclosure document called the client relationship summary, Form CRS.

Finra has been paying close attention to any potential Reg BI violations by brokerage firms.

“Our department’s Reg BI-related disciplinary actions have been increasing, with the expulsion of two firms for misconduct that included Reg BI violations,” wrote Bill St. Louis, Finra’s head of enforcement, in a blog post last month. “We have brought cases involving the Customer Relationship Summary form, Form CRS, excessive trading, complex products and variable annuities, with more in the pipeline.”

Meanwhile, an advocate for the fiduciary standard, which guides a registered investment advisor’s sales practices, still sees shortcoming in Reg BI.

“The issue for me is whether Finra or the SEC will ever bring an enforcement action that defines best interest the way it’s been understood for decades, meaning always associated with fiduciary in law up until five years ago,” said Knut Rostad, president of the Institute for the Fiduciary Standard.

“Reg BI has been sold to the industry as a non-fiduciary standard,” Rostad said. “The Reg BI rule is close to fiduciary or something in between a fiduciary and suitability. It’s supposed to be a higher standard of care when dealing with client than was the industry’s prior suitability rule. But is it really a higher standard?”