The Financial Industry Regulatory Authority Inc. has censured and fined a New Jersey-based broker-dealer and its chief compliance officer for allegedly violating the compliance and care obligations of Regulation Best Interest.
From January 2016 to March 2022, Network 1 Financial Securities, a firm with 14 branch offices and approximately 100 registered representatives, did not establish and maintain a reasonably designed supervisory system and did not identify and respond to red flags of excessive trading, according to a letter of acceptance, waiver and consent issued by Finra. As a result, clients received recommendations to place frequent trades that resulted in a cost-to-equity ratio as high as 50% and more than $533,500 in commissions and trading costs, Finra said.
The lack of a written supervisory procedure regarding excessive trading violated Regulation Best Interest, the regulator said. Finra also found Michael Molinaro, who took on the title of chief compliance officer at Network 1 in July 2017, to be in violation of Reg BI.
Without admitting or denying the findings, Network 1 agreed to a censure, restitution of the $533,500 plus interest and an additional $200,000 fine. Molinaro also agreed to a three-month suspension and a $5,000 fine.
Network 1 did not respond to a request for comment.
Reg BI requires that broker-dealers and their reps act in the best interests of a customer when a recommendation is made and not place the firm’s or a rep’s interests ahead of the customer’s interests. The rule has been in force since June 2020.
Finra is still in the early stages of enforcing Reg BI, and the action against Network 1 is notable for focusing on the compliance and care obligations of the rule, said Fred Reish, a partner at the law firm Faegre Drinker Biddle & Reath.
“Reg BI’s Compliance Obligation requires that broker-dealers have and enforce written supervisory procedures for compliance with the Care Obligation,” Reish said in an email. “If the facts of the AWC are accepted, it appears that the broker-dealer failed to do that.”
However, any time a chief compliance officer is the subject of an enforcement action, attorneys and compliance professionals wonder whether the regulator has overstepped its authority, said Max Schatzow, a partner at RIA Lawyers. The enforcement against Network 1 is probably on the edge, he said in email.
“The AWC shows Molinaro taking affirmative steps to seek to comply with the rules,” Schatzow said. “He amended the firm’s procedures and provided training on Reg BI. But, due to ignorance, a misunderstanding, or business pressure, he wasn’t thinking about managing ‘excessive trading’ in a generally accepted manner.”
Molinaro has consented to two previous Finra orders, which may have factored into Finra’s judgment.
“Finra is much more prone to pile on with prior ‘bad actors,’” Schatzow said.
Finra did not respond to a request for comment.
[Read more: Finra expels brokerage for Reg BI violations]
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