Quick facts
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Independent Financial Group Fine Amount: $500,000
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Date: 23 September 2024
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Violation Period: July 2020 - December 2022
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Primary Violation: Excessive trading (Churning)
Independent Financial Group Fine Overview
FINRA has fined Independent Financial Group, LLC (IFG) $500,000 for failing to establish and maintain a reasonable supervisory system to monitor excessive trading between July 2020 and December 2022. The firm's inadequate supervision allowed a registered representative to excessively trade on five customers' accounts, resulting in approximately $2.2 million in trading costs and $2.2 million in realized losses for these customers.
Details of the Independent Financial Group Fine
The enforcement action highlights several critical supervisory failures:
Alert System Deficiencies:
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IFG's compliance staff reviewed an internal excessive trade alert system instead of the required "Excessive Trading Report" available through their clearing firm.
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Unknown to IFG, alerts would not be generated for six months after the initial review of an account.
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Some alerts stopped appearing even when they had not been properly reviewed.
Procedural Gaps:
The firm's Written Supervisory Procedures (WSPs) lacked guidance on:
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How compliance personnel should review excessive trade alerts.
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When to take action based on alert information.
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Use of cost-to-equity ratios.
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What turnover rates could signal excessive trading.
Customer Impact:
The excessive trading affected five customers, including:
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A 77-year-old retiree with capital preservation objectives (20.3% cost-to-equity ratio).
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A trust owned by an 88-year-old retiree with Alzheimer's disease (23.4% cost-to-equity ratio).
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An engineer seeking income (20.3% cost-to-equity ratio).
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A 69-year-old retired police officer (13.7% cost-to-equity ratio).
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A dental practice with two accounts (27.1% cost-to-equity ratio).
Independent Financial Group Fines and Penalties
Select Quotes
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"No single test defines when trading is excessive, but factors such as the turnover rate, the cost-to-equity ratio, and the use of in-and-out trading in a customer's account are relevant to determining whether a member firm or associated person has excessively traded a customer's account... A turnover rate of six or a cost-to-equity ratio above 20 percent generally indicates that a series of recommended transactions was excessive."
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"IFG's procedures failed to provide reasonable guidance about how compliance personnel should conduct review of excessive trade alerts or when they should take action based upon the information contained in those alerts, and the firm did not include guidance on the use of cost-to-equity ratios or guidance on what turnover rates could signal excessive trading."
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"The duty to supervise under Rule 3110 also includes the responsibility for firms and their designated supervisors to reasonably investigate red flags of potential misconduct and to act upon the results of their investigation."
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