FINRA Makes First Regulatory Findings Under New Regulation Best-Interest

Stoltmann Law Offices is representing investors in arbitration claims where brokers have violated the “Best Interest” rule of the Securities and Exchange Commission (SEC), known as Regulation BI.

In its first enforcement action relating to Regulation BI, FINRA, the U.S. securities industry regulator, fined a former broker, Charles V. Malico, $5,000 for violating Reg BI “by recommending a series of transactions in the account of one retail customer that was excessive in light of the customer’s investment profile and therefore was not in that customer’s best interest,” according to Investment News.

FINRA alleged “Malico’s conduct occurred from July 2020 through November 2021, when he worked for Network 1 Financial Services Inc. He recommended to a customer, a 63-year-old tax preparer who was not identified, that he make more than 350 trades in his account, which generated $54,000 in commissions and other trading costs,” Investment News reported. The customer, who earned $100,000 annually and had a liquid net worth of approximately $50,000, had an account balance of about $30,000.

“Malico frequently recommended that Customer A buy and then sell a security, only to repurchase the same security weeks or even days later,” the settlement states.

“On four of those occasions, Malico recommended that the customer buy shares of the company only to sell them on the same day or the next day,” FINRA said. “Such in-and-out trading caused [the customer] to lose more than $6,000, while generating more than $3,200 in commissions and trading costs to Malico and Network.”

Overall, FINRA stated, “the trades that Malico recommended in the client’s account resulted in an annualized cost-to-equity ratio exceeding 158%. That means that [the customer’s] account would have had to grow by more than 158% annually just to break even. Thus, Malico’s recommendations made it virtually impossible for [the customer] to realize a profit and, in fact, [the client] lost more than $17,500 during the relevant period,” according to the order.

First registered with FINRA in 1987, Malico was registered with FINRA as a “general securities representative” with Network 1 Financial Securities from June 2016 through April 2022.

The Best Interest Rule replaced the previous weak “suitability” standard that had governed brokers’ duty with clients.  Although the SEC rule had been in place since June, 2020, this case is one of the first federal enforcement actions citing it. As such, the Reg BI compels brokers to act in a client’s best interest.

A FINRA spokesperson told Thinkadvisor.com “that this action represents FINRA’s first Reg BI-related fine.” The regulator’s action followed an enforcement review of an arbitration claim.

In this particular case, Calico’s brokerage firm, Network 1 Financial Securities would likely be liable for the losses sustained by the investor who was the victim of this broker’s excessive trading scheme. Brokerage firms are legally responsible for the conduct of their agents and can also be liable for negligent supervision.

If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!