What You Need to Know
- The firm and its chief compliance officer failed to establish, maintain and enforce a supervisory system to comply with Reg BI as it pertains to excessive trading.
- As a result, the firm failed to identify issues of excessive trading in eight client accounts, according to FINRA.
- These trades resulted in cost-to-equity ratios in excess of 50% in some cases.
The Financial Industry Regulatory Authority has fined and censured another broker-dealer, as well as its chief compliance officer, over Regulation Best Interest violations.
According to FINRA’s order, from January 2016 through March 2022, Network 1 Financial Securities “did not establish, maintain and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with the suitability requirements of FINRA Rule 2111 and the Care Obligation” of Reg BI as they pertain to excessive trading in violation of FINRA Rules 3110 and 2010.
As of June 30, 2020, Network 1 also violated Reg BI’s Compliance Obligation by not establishing, maintaining and enforcing WSPs reasonably designed to achieve compliance with Reg BI, which took effect on June 30, 2020.
From July 2017 through March 2022, according to the order, Network 1′s chief compliance officer, Michael Molinaro, “violated FINRA Rules 3110 and 2010 by not establishing, maintaining and enforcing a supervisory system, including WSPs, reasonably designed to achieve compliance with FINRA Rule 2111 and, as of June 30, 2020, Reg BI, as they pertain to excessive trading.”
Molinaro first registered with FINRA in 1993, FINRA states.
In February 2014, Molinaro registered as a General Securities Representative and General Securities Principal, among other registrations, through an association with Network 1. In July 2017, he became Network 1’s chief compliance officer.
In 2015, Molinaro entered into a letter of acceptance, waiver and consent in which he consented to findings, including that he failed to enforce a reasonably designed supervisory system with respect to private placements while associated with another broker-dealer.
The AWC suspended Molinaro from association with any FINRA member firm in any principal capacity for 45 days.
According to FINRA’s order, “In 2009, the State of Idaho entered an Order and Agreement finding that Molinaro, while associated with another broker-dealer, had failed to disclose on a Uniform Application 2 for Securities Industry Registration or Transfer (Form U4) registering another employee in Idaho, an Iowa order establishing heightened supervision for that employee.”
The Order and Agreement “cautioned Molinaro to refrain from violating the Idaho Uniform Securities Act of 2004 and also mandated that in the future he comply with the provisions of the Act,” FINRA states.
From January 2016 through March 2022, Network 1’s WSPs were not reasonably designed to achieve compliance with FINRA Rule 2111 and the Care Obligation of Reg BI as they pertain to trading, the order states.
“Beginning in July 2017, the firm’s WSPs designated Molinaro as the principal responsible for developing supervisory procedures for Network 1 with respect to all ‘products, services, or line functions that need to be the subject of written compliance policies and written supervisory procedures,’” according to the order.
Prior to June 30, 2020, the firm’s WSPs were not reasonably designed to achieve compliance with the suitability requirements of FINRA Rule 2111 with respect to excessive trading.
Network 1’s WSPs also were not reasonably designed to achieve compliance with Reg BI.
“As a result of these supervisory failures, Network 1 did not identify or address red flags of excessive trading in eight customer accounts,” FINRA states.
In each account, Network 1’s reps “recommended that the customers place frequent trades, and the customers routinely relied on those recommendations,” according to FINRA.
“The level of trading in each account, which resulted in a cost-to-equity ratio in excess of 20%, and in some cases, cost-to-equity ratios in excess of 50%, was inconsistent with the customers’ investment profiles and was not in the customers’ best interest. Collectively, the recommended trading caused these eight customers to pay more than $533,500 in commissions and trading costs,” the order states.
Network 1 was ordered to pay a $200,000 fine and restitution of $533,587 plus interest. Molinaro was suspended for three months from associating with any FINRA member firm and was fined $5,000.