The Seriousness of the Allegation and Its Impact on Investors
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The seriousness of the allegations against Michael Molinaro and his member firm, Network 1 Financial Securities, Inc. (CRD 13577), cannot be understated. The Financial Industry Regulatory Authority (FINRA) has found that they did not establish, maintain, and enforce Written Supervisory Procedures (WSPs) reasonably designed to achieve compliance with FINRA Rule 2111 and the Care Obligation of Rule 15l-1 of the Exchange Act (Reg BI) as they pertain to excessive trading. This violation is a serious matter as it directly affects the investors and their financial security.
According to the findings, Molinaro, who was responsible for developing supervisory procedures for the firm, failed to provide clear guidance on identifying excessively traded accounts. The firm’s WSPs did not specify what cost-to-equity ratio or turnover rate was suggestive of excessive trading, nor did they provide reasonable guidance on the steps to take after identifying an excessively traded account. This lack of oversight and guidance has resulted in eight customer accounts being excessively traded, causing these customers to pay more than $533,500 in commissions and trading costs.
Such allegations are serious as they indicate a breach of trust and fiduciary duty. Investors trust financial advisors like Molinaro and firms like Network 1 Financial Securities, Inc. to act in their best interest. However, the alleged failure to identify and address excessive trading in customer accounts suggests otherwise. This not only jeopardizes the financial security of the investors but also undermines their confidence in the financial advisory system.
Understanding the Allegation and the FINRA Rule in Simple Terms
The allegations against Molinaro and Network 1 Financial Securities, Inc. revolve around the violation of FINRA Rule 2111 and the Care Obligation of Rule 15l-1 of the Exchange Act (Reg BI). These rules are designed to protect investors from unethical practices such as excessive trading.
FINRA Rule 2111, also known as the Suitability Rule, requires that a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer. This is based on the information obtained through the reasonable diligence of the firm or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose.
On the other hand, the Care Obligation of Rule 15l-1 of the Exchange Act (Reg BI) requires broker-dealers to act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the retail customer. This includes understanding the potential risks, rewards, and costs associated with the recommendation.
Why It Matters for Investors
The allegations against Molinaro and Network 1 Financial Securities, Inc. are a stark reminder of the risks investors face when entrusting their hard-earned money to financial advisors and firms. The lack of adherence to established rules and regulations can lead to significant financial losses for investors.
When financial advisors and firms fail to act in the best interest of their clients, it not only leads to financial losses but also erodes the trust and confidence investors have in the financial advisory system. This can deter potential investors from investing, thereby limiting their ability to grow their wealth and secure their financial future.
Furthermore, excessive trading can lead to unnecessary costs for investors. Each trade incurs a cost, and frequent trading can result in significant costs that can erode the investor’s returns. Therefore, it is crucial for investors to be aware of the trading activities in their accounts and ensure that their financial advisors and firms are acting in their best interest.
Red Flags for Financial Advisor Malpractice and Recovering Losses
Investors should be vigilant for red flags that may indicate financial advisor malpractice. These include excessive trading, unauthorized transactions, unsuitable investments, and a lack of clear communication or transparency.
Investors who have suffered financial losses due to the alleged malpractice of Molinaro and Network 1 Financial Securities, Inc. have a recourse. They can recover their losses through FINRA Arbitration, a dispute resolution process that is quicker and less formal than litigation.
Haselkorn & Thibaut, a national investment fraud law firm with offices in Florida, New York, North Carolina, Arizona, and Texas, is currently investigating Molinaro and Network 1 Financial Securities, Inc. The firm has over 50 years of experience and an impressive 98% success rate in recovering losses for investors. They offer free consultations to clients and operate on a “No Recovery, No Fee” policy. Investors can reach them at their toll-free consultation number, 1-800-856-3352.
