The Financial Industry Regulatory Authority expelled Reid & Rudiger, a nine-broker broker-dealer based at 40 Wall Street in New York, on Wednesday, and barred its two founders from the securities industry for churning and excessive trading in customer accounts, according to a settlement posted on FINRA's website.
The firm, which opened in 1999 during the dot-com boom, had already been winding down for weeks. At the end of April, it filed a broker-dealer withdrawal request with FINRA, and in early June the regulator canceled its registration after the firm failed to pay industry fees. A call to the firm Wednesday was not returned.
FINRA determined that Reid & Rudiger and its co-founders, Clifford Reid and Edward Rudiger Jr., excessively traded a total of 20 accounts over six years, several of which were also churned with intent to defraud or reckless disregard for customers' interests. The misconduct caused clients to incur approximately $2 million in commissions and trading costs and roughly $2.7 million in losses, according to the regulator.
Excessive trading, FINRA explained, generates commissions for the broker but is not in the customer's best interest. Churning is a more severe form, undertaken with fraudulent intent or reckless disregard. Both Reid and Rudiger recommended a high-volume, high-cost market-timing strategy that made it virtually impossible for customers to profit, violating the Care Obligation of Regulation Best Interest and other industry rules.
The misconduct was evident through disproportionate commissions and trading costs that resulted in high cost-to-equity ratios, meaning customers needed substantial returns just to break even. FINRA also suspended the firm's supervisors, Marc Harrison and Kelli Mezzatesta, for three months in all principal capacities for failing to identify and investigate red flags related to the pervasive misconduct.
The case underscores ongoing regulatory scrutiny of small broker-dealers and the importance of supervisory systems. As FINRA faces existential questions in an anti-regulatory climate, enforcement actions like this highlight the regulator's role in policing misconduct. The expulsion also follows a recent Sixth Circuit ruling that rejected a FINRA jurisdiction challenge, reinforcing the regulator's authority.
For financial advisors, the case serves as a reminder that Reg BI's Care Obligation requires recommendations to be in the client's best interest, not merely suitable. The $2 million in commissions and $2.7 million in losses from 20 accounts illustrate the potential harm from excessive trading strategies.
