FINRA's First Regulation Best Interest AWC

Attorney Advising Disclaimer

When FINRA sanctioned Network 1 Financial Securities broker Charles Malico after an investigation into improper trading recommendations and excessive transactions that harmed a client and resulted in account losses, its report contained a key phrase the new standard to determine whether a broker, dealer, or representative has harmed a client through financial misconduct: "best interest."

As of 2020, broker-dealers and associated persons must comply with the Securities Exchange Act's Regulation "Best Interest Obligation," which requires such a person to act in the best interest of that retail customer at the time of the recommendation and without putting the firm's or broker's interest ahead of that of the client's. The SEC first adopted the Regulation Best Interest Rule Package in 2019, and now FINRA is enforcing the rule, which is good news for investors.

In finding Charlie Vincent Malico (CRD #1507282) made a series of excessive trades and recommendations that resulted in a customer losing tens of thousands of dollars, FINRA used not its longstanding buzzword "suitability," but the more stringent standard of Regulation Best Interest (BI).

FINRA's report describes the misconduct that can apply not only to pre-existing "suitability" standards, but takes things a step further by considering any action that doesn't put the client first: "Malico placed his and Network 1's interests ahead of the customer."

The report discusses a multi-factor examination of judging trading to be excessive, for instance—which still does include a client's investment profile, risk tolerance, etc., but also factors in costs such as sales charges, commissions, and other expenses.

Regulation BI includes several additional obligations:

(A) A disclosure obligation, which requires a broker/dealer/person to provide their customer with full and fair written disclosure of certain required material facts;

(B) A care obligation, which requires the broker to understand the potential risks, rewards, and costs associated with the recommendation and to have a reasonable basis to believe the recommendation or series of recommendations is in the customer's best interests based on the client's investment profile and risk tolerance preferences;

(C) A conflict of interest obligation, which seeks to identify and disclose or eliminate all conflicts of interests associated with recommendations, as well as disclosure of material limitations, as well as eliminating any sales contests, quotas, bonuses, or other non-cash compensation based on product sales within a limited period of time;

(D) a compliance obligation, which requires broker-dealers establish, maintain, and enforce written policies and procedures designed to comply with Regulation BI, such as supervisory policy documents.

Using this multi pronged approach, FINRA noted not just the $17,500 in losses suffered by the customer, but further augmented the damages with an analysis showing the customer also paid more than $54,000 in commissions and other sales costs to effect those excessive trades that resulted in $17,500 in losses.

Between the two, FINRA thus concluded that Malico's recommendations violated Regulation BI (also called Exchange Act Rule 15I-1) because they were not in the customer's best interests, as well as FINRA's existing Rule 2010.

If you invested with a broker, investment adviser, or brokerage firm whose actions such as recommendations and trades were not in your best interests, resulting in losses or other damages as a result of commissions and other expenses associated with excessive transactions or churning, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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