On Mar. 31, 2023, the Financial Industry Regulatory Authority (FINRA) suspended former New York-based Newbridge Securities Corporation broker Dana Davis from associating with any FINRA member in all capacities. Between July 2015 and July 2020, FINRA found that Davis recommended unsuitable use of margin to effect trades in three separate customer accounts. Because of these recommendations, customers paid more than $150,000 in commissions, fees, and margin interest.
Without admitting to or denying the findings, Davis consented to the sanctions and to the entry of findings that he “recommended unsuitable use of margin in customer accounts.” Read the full BrokerCheck report here.
This is not the first time that Davis has found himself at the center of allegations. According to the BrokerCheck report, he was named in a 2018 customer arbitration, with another customer arbitration following in 2021. These complaints also alleged sales practice violations, which included unsuitability.
What is a margin account and what constitutes unsuitable use?
FINRA states that a “margin account is a type of brokerage account in which a broker-dealer lends an investor cash, using the account as collateral, to purchase securities.” While margin increases an investor’s purchasing power, it also exposes the investor to risk. For example, when trading securities on margin, there is the potential to lose more money than was invested.
As further detailed by FINRA, buying on margin incurs a cost, which comes in the form of interest charged on the amount borrowed. Investors are accountable for repaying the amount borrowed, plus interest, even if they end up losing money on the securities purchased on margin. A margin balance is that money owed by the customer to the broker-dealer. An investor’s equity in a margin account is the securities’ value minus the amount the customer owes the firm.
Allegedly, Davis recommended the unsuitable use of margin in several customer accounts. These customers were “not experienced or sophisticated investors and did not understand margin.” FINRA’s investigation uncovered that, in these specific instances, the “margined positions often experienced realized losses, including as a result of margin calls, and incurred trading costs and margin interest charges.” Moreover, FINRA found that Davis’s recommendations exposed customers to “significant risk, increased costs, and sizeable losses in their accounts.”
What does FINRA expect of its investors when recommending transactions?
According to FINRA Rule 2111, a member or an associated person must have a “reasonable basis to believe that a recommended transaction is suitable for the customer based on the customer’s investment portfolio.” An investment portfolio includes things like the customer’s age, other investments, experience with investing, risk tolerance, investment objectives, tax status, and more.
FINRA Rule 2010 also dictates that members shall observe “high standards of commercial honor and just and equitable principles of trade” in conducting business. A financial advisor who does not consider a customer’s needs and recommends unsuitable uses of margin, particularly to those who are inexperienced investors, does not meet the standards of commercial honor.
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If you or someone you know has lost money because of broker or financial advisor misconduct, Lance McCardle and his team of experienced investment fraud lawyers can help. Our firm has helped hundreds of clients recover their losses due to broker fraud or negligence. Contact us today.