The Financial Industry Regulatory Authority suspended a registered rep for six months in the agency’s first disciplinary action under the Regulation Best Interest rules.
Charles Malico, a former rep with Network 1 Financial Securities, settled the charges with FINRA without admitting or denying them, but also agreed to a $5,000 fine in addition to the suspension.
According to the order, Malico recommended a number of transactions in one client account that “was excessive in light of the customer’s investment profile and therefore was not in that customer’s best interest.”
The action is the first related to the Securities and Exchange Commission’s rule passed in 2020 governing conduct by broker/dealers and registered investment advisors, and follows the commission’s first Reg BI-related enforcement action earlier this year.
Malico has been in the industry since 1987, affiliated with more than 20 firms (including several that have been expelled from the industry by FINRA), according to his BrokerCheck profile, before arriving at Network 1 in 2015.
Starting in July 2020 through November of the following year, Malico made recommendations to an unnamed client, described as a 63-year-old taxpayer with an annual income of $100,000 and a liquid net worth of $50,000.
Though the client’s average account balance totaled only $30,000, Malico recommended more than 350 trades in his account during the course of the time period in question, resulting in the client paying more than $54,000 in commissions and other costs. In some situations, Malico would recommend the client buy and sell a security only to buy it back days or weeks later.
In a six-month span, Malico advised the client to buy and sell shares of the same stock six separate times; on four of those sales, Malcio advised the client (known as Customer A in the settlement) to buy the shares only to sell them within the next two days, according to FINRA.
“Collectively, the trades that Malico recommended in Customer A’s account resulted in an annualized cost-to-equity ratio exceeding 158 percent—meaning that Customer A’s account would have had to grow by more than 158 percent annually just to break even,” the order read.
In all, the client lost more than $17,500 during the period in which Malico purportedly recommended these trades. In determining whether it was a Reg BI violation, FINRA stated there was no single test to pinpoint excessive trading, but “factors such as the turnover rate, the cost-to-equity ratio and the use of in-and-out trading” in the client’s account were relevant.
The SEC filed its first Reg BI violation in June against Western International Securities (a dual registrant owned by Atria Wealth Solutions) and five of its reps, accusing them of violating the rule through recommending and selling “L” bonds offered by GWG Holdings.
In the complaint, the SEC accused the reps of failing to follow compliance suggestions about the bonds, arguing the firm failed to set customer thresholds for purchasing despite suggestions included in GWG’s prospectus about the product.