According to FINRA, Frank L. Martin was suspended from association with any FINRA member in any principal capacity for three months (with no monetary sanctions due to financial status) for failing to reasonably supervise registered representatives at his member firm who each excessively traded one or more customer accounts. Martin's supervisory failures allowed representatives under his supervision to engage in trading that caused customers to pay $663,463 in commissions, fees, and margin interest, and FINRA has ordered approximately $500,000 in restitution for these customers in settlements with some of the representatives.
Martin failed to investigate red flags of unsuitable or excessive trading despite numerous indicators including high turnover and cost-to-equity ratios in customer accounts. While Martin signed off on daily trade blotters and periodic exception reports, purportedly indicating he had reviewed them, he did not reasonably investigate red flags of potentially unsuitable or excessive trading such as frequent trading, in-and-out trading, and proceeds transactions. Martin frequently closed out exception reports without evidence of any reasonable review to verify that trades were suitable.
Excessive trading, or churning, occurs when brokers engage in trading primarily to generate commissions rather than to benefit customers. Warning signs include high turnover (frequent buying and selling), in-and-out trading (buying and selling the same securities in short timeframes), and high cost-to-equity ratios (where commissions and fees consume a large portion of account value). Supervisors are required to monitor for these red flags and investigate when they appear. Martin's failure to conduct reasonable investigations despite clear warning signs allowed the excessive trading to continue and caused significant customer harm.
As a result of Martin's unreasonable review practices, he failed to identify numerous accounts being excessively traded and took no steps to limit the trading or escalate the activity to others at the firm. The magnitude of customer losses—over $660,000 in commissions and fees—demonstrates the serious consequences of inadequate supervision. For investors, this case illustrates the importance of firms' supervisory systems in protecting customers from abusive trading practices. When supervisors fail to perform their duties, harmful conduct can persist unchecked. Investors should monitor their accounts for signs of excessive trading, including frequent transactions that generate substantial commissions, trading that seems inconsistent with stated investment objectives, and high turnover that does not align with their risk tolerance or time horizon. Account statements show commission costs, and investors should question trading patterns that generate high costs without corresponding benefits. If concerns arise, investors should escalate complaints to firm compliance departments and, if necessary, to FINRA. The substantial restitution ordered in related cases demonstrates that regulators take excessive trading seriously and that customers can recover losses through the disciplinary process.
