According to FINRA, James Brett Stuart was named a respondent in a FINRA complaint alleging that he failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, that was reasonably designed to achieve compliance with the Care Obligation of Regulation Best Interest and FINRA Rule 2111 as they pertain to excessive trading. Stuart was allegedly responsible for establishing and maintaining his member firm's written supervisory procedures, which did not describe how the firm should identify or respond to red flags of possible excessive trading and did not address Reg BI at all following its effective date.
The complaint also alleges that Stuart failed to reasonably supervise trading in customer accounts. Stuart allegedly did not review alerts received by his firm showing that accounts had been charged high commissions equaling at least 30 percent of their value, and he did not otherwise take any steps to determine whether frequent and high-cost trades in the accounts were consistent with customers' investment profiles. Stuart allegedly failed to identify or respond reasonably to red flags of possible excessive trading in customers' accounts. In fact, the trading recommended in the accounts allegedly resulted in cost-to-equity ratios of approximately 30 percent and total costs of approximately $236,500 for one account and $22,000 for another.
Cost-to-equity ratios of 30 percent mean that accounts would need to generate returns of 30 percent just to break even after costs—a threshold that is extremely difficult to achieve and that makes profitable investing nearly impossible for customers. The complaint also alleges that Stuart failed to appear for on-the-record testimony that FINRA requested as part of its investigation into his supervision of a registered representative. Stuart initially appeared for testimony but requested an adjournment before the testimony was complete. FINRA agreed to adjourn and issued subsequent requests for Stuart to appear again to complete his testimony, but Stuart allegedly failed to appear to complete his testimony.
Stuart's alleged failures as a supervisor are particularly serious given his role in establishing and maintaining his firm's written supervisory procedures. Principals who fail to create adequate procedures or to supervise effectively can enable widespread harm to customers. The failure to address Regulation Best Interest in the firm's procedures following its June 2020 effective date is especially troubling, as Reg BI established important new obligations regarding broker-dealers' duty to act in customers' best interests. The alleged failure to respond to alerts showing commissions of 30 percent of account value represents an egregious supervisory breakdown.
For investors, this case illustrates the critical role of firm supervision in protecting customers from excessive trading and other harmful practices. When supervisors fail to perform their duties, individual brokers may engage in churning and other abusive practices without detection. Investors should understand that firms have obligations to supervise their representatives' activities, and supervisory failures that enable customer harm can result in firm liability. While these are allegations that have not yet been proven, they suggest systemic compliance failures that should concern any investor. The additional allegation that Stuart failed to complete his FINRA testimony raises further questions about his willingness to be accountable for his supervisory failures.
