The Financial Industry Regulatory Authority (Finra) has suspended former Aegis Capital Corp. broker Douglas Szempruch from the securities industry for 12 months for excessive and unauthorized trading, the agency announced Tuesday.
Finra alleged Szempruch, who operated out of Aegis’s Melville, N.Y. branch, with recommending and executing excessive and unsuitable trades in six customer accounts between August 2014 and June 2017. He was also charged with exercising discretionary authority without prior written authorization in seven customer accounts.
Finra also charged Szempruch with sending out email communications containing misleading statements about an investment opportunity from his firm-approved email account, Finra said.
Szempruch consented to the suspension and agreed to Finra’s order to pay nearly $100,000 in restitution to customers.
Szempruch is the sixth Aegis advisor to be disciplined by Finra this year. The firm itself was sanctioned in March by FINRA, fined $80,000 and ordered to pay $43,912 restitution to customers for allegedly failing to give favorable pricing to customers in connection with 26 corporate bond transactions. In total, Aegis Capital Corp., based in New York City, has 36 regulatory events, according Finra’s BrokerCheck.
Finra alleged that Szempruch recommended excessive trading in the six customers’ accounts, and the customers routinely followed his recommendations. Additionally, Szempruch is alleged to have exercised discretion when executing trades in the six customers’ accounts. As a result, Szempruch “exercised de facto control over the customers’ accounts,” according to the regulator.
Excessive trading occurs when a financial advisor makes many trades in a customer’s account, not to benefit the customer but to generate commissions for the broker, according to Finra.
There are two primary indicators used to evaluate whether a financial advisor excessively traded an account. The first is turnover rate, which represents the number of times a portfolio of investments is replaced by another portfolio. Generally, a turnover rate of six suggests excessive trading. According to Finra, Szempruch’s customer accounts at issue had a turnover rate between 7.69 and 48.08.
The second indicator used to assess whether trading is excessive in an investment account is its cost-to-equity ratio. The cost-to-equity ratio measures the amount an account must appreciate to cover commissions and other expenses. That is, how much the account needs to grow just to break even. A cost-to-equity ratio of 20% generally indicates excessive trading has occurred. According to Finra, the accounts at issue had cost-to-equity ratios between 34.3% and 109.14%.
Specifically, with regard to exercising discretion without authorization, Finra alleged none of the seven customers in question provided written authorization to Szempruch to exercise discretion in their accounts and Aegis Capital did not accept any of the seven accounts as discretionary accounts, Finra alleged.