In the AWC entitled Charles V. Malico, Respondent, Matter No. 2021069405501 resolved at the end of last year, FINRA settled its first case involving a violation of Regulation Best Interest (Reg BI). The matter resembled a traditional suitability matter where Mr. Malico, without admitting or denying, accepted and consented to findings that he willfully violated the Best Interest Obligation under 15l-1of the Securities Exchange Act of 1934 (REG BI’s Care Obligation) by recommending a series of transactions in the account of a customer that was excessive in light of the customer’s investment profile and thus was not in the customer’s best interest. The AWC stated that no single test defines when trading is excessive, but 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.
According to the AWC, Mr. Malico placed his and broker-dealer’s interests ahead of the interests of the customer. Among other things, ge recommended over 350 trades generating commissions and trading costs exceeding $54,000 for a customer who had an approximate annual income of $100,000 and liquid net worth of $50,000. Malico’s recommended trades in the customer’s account “resulted in an annualized cost-to-equity ratio exceeding 158 percent—meaning that [the customer’s] account would have had to grow by more than 158 percent annually just to break even. As a result, Malico’s recommendations made it virtually impossible for Customer A to realize a profit and, in fact, Customer A lost more than $17,500 during the relevant period.”
Malico agreed to a six month suspension from associating with any FINRA member in any capacity, and a $5,000 fine. As Malico’s findings included that he willfully willfully violated Exchange Act Rule 15l-1 and violated FINRA Rule 2010, Malico is also subject to statutory disqualification.