A New Jersey-based broker-dealer and its chief compliance officer agreed to pay approximately $740,000 combined, plus interest, as part of a settlement with the Financial Industry Regulatory Authority (FINRA) addressing alleged Regulation Best Interest (Reg BI) compliance failures.
Network 1 Financial Securities will pay a $200,000 fine, approximately $534,000 in restitution, and be censured, according to a FINRA consent order filed Aug. 31.
The firm’s CCO, Michael Molinaro, will pay a $5,000 fine and be banned for three months from association with any FINRA member in all principal capacities, per the order. The self-regulatory organization noted this is Molinaro’s second such suspension, after a 45-day ban in 2015 for alleged supervision failures.
The details: From January 2016 through March 2022, Network 1 failed to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with Reg BI’s care obligations, FINRA alleged.
From the time he became CCO in July 2017 through March 2022, Molinaro violated FINRA rules by not establishing, maintaining, and enforcing an adequate supervisory system, per the order.
Prior to Reg BI taking effect June 30, 2020, Network 1’s written supervisory procedures (WSPs) were not reasonably designed to achieve compliance regarding excessive trading, FINRA said, including:
- Not setting how the firm’s supervisors should apply certain listed factors to identify potentially excessively traded accounts;
- Not identifying what cost-to-equity ratio or turnover rate was suggestive of excessive trading; and
- Failing to provide supervisors with reasonable guidance about what steps they should take after identifying an excessively traded account.
“For example, the WSPs did not specify when, or in what circumstances, the supervisor should contact customers with actively traded accounts,” the order stated. “The WSPs also did not specify whether, or in what circumstances, supervisors should consider restricting the commissions that could be charged in a customer’s account.”
Network 1 received reports from its clearing firm that were relevant to identifying excessive trading, including a monthly report that flagged accounts with high cost-to-equity ratios, the order stated. However, from January 2016 through June 2018, the firm did not review those reports, FINRA alleged.
Compliance considerations: FINRA acknowledged corrective actions taken by Network 1 to align its policies and procedures for trading in accounts “actively traded” with Reg BI, including amending its WSPs to create “additional heightened review” of those accounts.
Network 1 did not respond to a request for comment. The firm agreed to the settlement without admitting or denying FINRA’s findings.