Barely three weeks after a pair of Laidlaw & Company brokers settled charges of failing to look out for their clients' best interests, the firm had another encounter with regulators.
But this time, London-based Laidlaw wasn't accused of violating Regulation Best Interest, the industry's standard of client care that calls on brokers to recommend fully-explained investments that align with a client's financial goals.
Instead, the charges brought by the Financial Industry Regulatory Authority came under the old "suitability" standard, a lower, now extinct-threshold of client care that merely required brokers to recommend investments deemed suitable. The rule was replaced by Reg BI In June 2020.
Technically, the suitability standard is dead. But it still lives on in FINRA enforcement. Laidlaw agreed in a Feb. 17
By contrast, FINRA's deal on Jan. 31 with the two Laidlaw brokers over excessive trading in clients' accounts used the Reg BI standard — even though the violations took place over July 2018-January 2021, a period whose early years were governed by the suitability standard.
In general, it's a tale of two settlements under two different client-care obligations. And it's raising questions over why FINRA, the broker-dealer industry's self-regulator, didn't hold the firm accountable for its brokers' Reg BI violations.
"I can't imagine where you have brokers excessively trading clients' accounts and there not being a supervisory violation in connection with it," said
In the Reg BI settlement with the brokers,
Reg BI requires broker-dealers to act in the "best interest" of clients when recommending securities and investment strategies. Although the rule doesn't impose the higher fiduciary standard of client care that applies to independent investment advisors and requires advisors to simply disclose conflicts of interest, not avoid them, it's considered a step up from the prior suitability standard.
Louis Straney, the managing partner of Arbitration Insight and an expert witness and consultant in securities litigation, said it's strange FINRA's earlier Reg BI allegations stopped with the two brokers and didn't rise to the firm level.
"It doesn't make sense," he said. "It's the firm's duty to have procedures in place and to enforce those procedures."
One potential reason FINRA's February settlement with Laidlaw makes no mention of Reg BI is simple: The actions cited occurred before the new regulation came into force. Reg BI was adopted in June 2019 but didn't officially take effect until a year later.
The February settlement centered on allegations that Laidlaw's brokers failed to properly research private investments they offered to clients between February 2018 and January 2019, when the suitability standard was still in force. In one example cited by regulators, Laidlaw agents were accused of presenting investors with an opportunity to put their money into an educational technology company. Rather than do their own research to learn if the investment was sound, as required by FINRA, the brokers relied almost exclusively on documents provided by the company itself.
Laidlaw is headquartered in London, according to FINRA's BrokerCheck and New York State filings, but is registered to do business in New York, giving FINRA jurisdiction over it. Confusingly, the company's website and a receptionist say the company is headquartered in New York.
The firm, which was founded in 1999, has a checkered history with regulators. Its
FINRA said it doesn't comment on its investigations. A Laidlaw representative declined to speak.
Both FINRA and the Securities and Exchange Commission, Wall Street's regulator, have made enforcing Reg BI a priority. FINRA warned in a
Reg BI has been in force for more than two years, but so far, FINRA has brought only four cases alleging violations of the standard. The first came last October when regulators settled excessive trading charges against Charles V. Malico, a broker at Network 1 Financial Securities in Huntington Station, New York. Malico agreed to a $5,000 fine and six-month suspension.
Next came the settlements with the two Laidlaw brokers, Short and Cirella. Short agreed to pay back $116,589 in commissions plus interest, and Cirella agreed to refund $27,566 in commissions plus interest. They also both agreed to pay a $5,000 fine and to be temporarily banned from all dealings with FINRA.
FINRA's fourth Reg BI settlement came on Feb. 10 when New York-based
The SEC, for its part, has brought only one Reg BI case. In
FINRA's February settlement with Laidlaw involved accusations that the firm had failed to keep mandated amounts of
Laidlaw was accused of letting its net capital fall below required minimums during four periods between February 2018 and July 2022. At one point, its net capital fell more than $1.6 million below the required amount, in part because the firm had improperly accounted for a lease obligation. In its settlement, Laidlaw agreed to pay a $200,000 fine, set up an internal supervisory system and take other remedial steps.
