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Regulation and Compliance > Federal Regulation > FINRA

Ex-Broker Hit With Reg BI Fine, Suspension

By Melanie Waddell

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What You Need to Know

  • The rep recommended more than 350 trades in a 63-year-old client's account in 16 months, FINRA said.
  • The client had a liquid net worth of approximately $50,000.
  • The in-and-out trading caused the customer to lose money and violates Reg BI.

The Financial Industry Regulatory Authority has suspended and fined a former Network 1 Financial Securities broker with violating Regulation Best Interest for excessive trades in a 63-year-old client’s account.

FINRA suspended Charles V. Malico for six months and ordered him to pay a $5,000 fine.

In a separate order, FINRA also ordered Network 1 to pay a $200,000 fine and $533,587 in restitution plus interest for the firm and its Chief Compliance Officer’s failure to establish, maintain and enforce written supervisory procedures reasonably designed to achieve compliance with Reg BI.

According to FINRA’s order, Malico first registered with FINRA in 1987.

From June 2016 through April 2022, Malico was registered with FINRA as a general securities representative through an association with Network 1 Financial Securities Inc.

Malico is not currently registered or associated with any FINRA member firm. However, he remains subject to FINRA’s jurisdiction.

From July 2020 through November 2021, Malico “willfully violated” the best interest obligation under Rule 15l-1 of the Securities Exchange Act of 1934 and violated FINRA Rule 2010 by recommending a series of transactions in the account of one retail client that was excessive in light of the client’s investment profile.

While no single test defines when trading is excessive, “factors such as the turnover rate, the cost-to-equity ratio, and the use of in-and-out trading in a customer’s account are relevant to determining whether a member firm or associated person has excessively traded a customer’s account in violation of Reg BI,” FINRA explains.

The turnover rate represents the number of times that a portfolio of securities is exchanged for another portfolio of securities.

From July 2020 through November 2021, Malico recommended to one of his retail clients at Network 1 a series of transactions that was excessive in light of that client’s investment profile, placing his and Network 1’s interests ahead of the interests of the client.

The Client

The client was a 63-year-old tax preparer with an annual income of approximately $100,000 and a liquid net worth of approximately $50,000.

Although the client’s ”average account balance during the relevant period was less than $30,000, Malico recommended that he make more than 350 trades in his account, which caused [the customer] to pay more than $54,000 in commissions and other trading costs.”

Malico frequently recommended that the customer buy and then sell a security, only to repurchase the same security weeks or even days later, FINRA’s order explains.

For example, between January and July 2021, Malico recommended that the customer buy and then sell shares of the same biotechnology company on six separate occasions.

“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 1.”

Collectively, the trades that Malico recommended in the customer’s account “resulted in an annualized cost-to-equity ratio exceeding 158% — meaning that Customer A’s account would have had to grow by more than 158% annually just to break even,” the order states.

As a result, Malico’s recommendations made it virtually impossible for the customer to realize a profit and, in fact, the customer lost more than $17,500 during the relevant period, FINRA said.

Melanie Waddell

@Think_MelanieW

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