Still few, FINRA's latest Reg BI case charges firm with overtrading

FINRA continues to dribble out cases with the still somewhat new Regular Best Interest conduct standard for broker-dealers, hitting a New Jersey-based firm with more than $700,000 in fines.

The Financial Industry Regulatory Authority reached an agreement on Aug. 31 with Network 1 Financial Securities over allegations that the Red Bank, New Jersey-based firm had not established a reasonable supervisory system and had not properly responded to warning signs of excessive trading in client accounts. Among other things, the brokerage industry's self-regulator accused Network 1 of violating the care obligation of Regulation Best Interest, which requires brokers to use reasonable diligence and skill when making recommendations to clients.

In agreeing to FINRA's letter of acceptance, waiver and consent and without admitting the charges, Network 1 will pay $533,500 plus interest in restitution and a $200,000 fine. The $533,5000 is equal to what FINRA alleges Network 1's unchecked frequent trading cost clients.

Separately Michael Molinaro, the chief compliance officer at Network 1, has agreed to a $5,000 fine and a three-month suspension.

Regulation Best Interest, or Reg BI, has been in effect since June 2020. It generally requires broker-dealers to not place their interests ahead of clients' and to disclose unavoidable conflicts of interest.

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Critics tend to consider it weaker than the fiduciary standard that obliges investment advisors always to put their clients' interests first. So far, there have only been a handful of cases involving Reg BI.