The Financial Industry Regulatory Authority has disciplined a formerly registered representative for violating Regulation Best Interest (“Reg BI”).  In a first-of-its-kind disciplinary action, Charles Malico of Huntington Station, New York, has been fined $5,000 and suspended for six months for “recommending a series of transactions in the account of one retail customer that was excessive in light of the customer’s investment profile and therefore was not in that customer’s best interest,” according to FINRA’s order.

Malico was charged with placing his and his associated broker-dealer’s interests ahead of the interests of his customer.  The customer was a 63-year-old tax preparer with an annual income of approximately $100,000, a liquid net worth of approximately $50,000, and an average account balance of $30,000 during the relevant period.  FINRA alleged that between July 2020 and November 2021, Malico “recommended the customer make more than 350 trades in his account, which caused the customer to accumulate more than $54,000 in commissions and other trading costs.” 

Malico “frequently recommended” the customer “buy and then sell a security, only to repurchase the same security weeks or even days later.”  For instance, on Malico’s recommendation, the customer bought and sold “shares of the same biotechnology company on six separate occasions” between January and July 2021.  FINRA determined that Malico’s recommended traded “resulted in an annualized cost-to-equity ratio exceeding 158 percent,” making it “virtually impossible” for the customer to make a profit.

Since June 30, 2020, Broker-dealers and associated persons have been required to comply with Regulation Best Interest.  Reg BI contains two primary obligations:  the Best Interest Obligation and the Care Obligation.  The Best Interest Obligation requires brokers-dealers and associated persons to “act in the best interest” of retail customers “when making a recommendation of any securities transaction or investment strategy involving securities”.  The Care Obligation requires broker-dealers and associated persons to “have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive” and fits the customer’s investment profile.