According to FINRA, Scott Alan Kaufman was barred from association with any FINRA member in all capacities for refusing to appear for on-the-record testimony requested by FINRA in connection with its investigation of the circumstances giving rise to a Form U5 filed by his member firm.
Kaufman was found in violation of FINRA's rule requiring cooperation with regulatory investigations. The firm filed a Form U5 stating that it had terminated Kaufman's registration due to his use of a fixed income trading strategy designed to increase bond ratings at the expense of lowering yield to customers. This allegation raised serious concerns about whether Kaufman prioritized his own interests or the firm's interests over customer interests, potentially violating the duty to recommend suitable investments and act in customers' best interests.
Fixed income securities, such as bonds, involve a trade-off between risk and return. Bond ratings reflect credit quality, with higher-rated bonds generally offering lower yields because they carry less risk of default. A trading strategy designed to increase bond ratings while lowering yields could benefit a representative or firm by making portfolios appear more conservative or by generating trading commissions, but would harm customers by reducing their investment returns. Such a strategy could constitute unsuitable recommendations if it did not align with customers' investment objectives and risk tolerance.
FINRA requested that Kaufman appear for on-the-record testimony to investigate the trading strategy and determine whether his recommendations violated suitability or other securities rules. However, Kaufman refused to appear for testimony, preventing FINRA from questioning him about his conduct and the allegations in the Form U5. This refusal obstructed FINRA's investigation into whether customers were harmed by unsuitable bond trading recommendations.
The failure to cooperate is particularly concerning in this case because the allegations involve a systematic trading strategy that could have affected multiple customers over an extended period. By refusing to appear for testimony, Kaufman prevented FINRA from understanding the full scope of the conduct and assessing potential customer harm. The bar protects investors by removing from the industry someone who refused to answer questions about a potentially harmful trading strategy.
