The case against PHX Financial caught my attention because it involves actions of the firm before and after the compliance date of Regulation BI.
During the Pre-Reg BI Period, PHX failed reasonably to supervise Representative 1, within the meaning of Section 15(b)(4)(E) of the Exchange Act, with the view to preventing and detecting Representative 1’s violations of Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Further, during the Reg BI Period, PHX violated the Reg BI Care Obligation, Exchange Act Rule 15l-1(a)(2)(ii), when Representative 1 recommended a series of transactions to retail customers without a reasonable basis to believe that the recommended transactions, even if in the customers’ best interests when viewed in isolation, were not excessive and in the customers’ best interests when taken together in light of the customers’ investment profiles.
The actions were the same. A PHX registered representative recommended a short-term, high-volume investment strategy to at least eight of PHX’s retail customers . The customers each lost money in their PHX brokerage accounts while PHX and the Representative made over $400,000 in commissions and fees.
PHX had a a process for identifying accounts with what appeared to be excessive trading. The procedures fell apart when trying to address and manage the issue.
The SEC order characterized the problem in the Pre-BI period as fraud and supervisory failure. While after BI it’s a violation of the Care Obligation under Reg BI.
Post Reg BI, the SEC appears to hang its hat on the accounts having cost-to-equity ratios in excessive of 40% and turnover rates from 7 to 53 in the affected accounts.
Sources:
- In the Matter of PHX Financial (Oct.. 16 2024)
- FINRA SEC Regulation BI
- Regulation BI
