Network 1 Financial Securities Inc., a securities broker dealer headquartered in Red Bank, New Jersey, as well as stockbroker and Chief Compliance Officer, Michael Robert Molinaro, have been sanctioned by Financial Industry Regulatory Authority (FINRA) because Network 1 Financial Securities Inc. and Molinaro failed to supervise suitability of securities transactions in customer accounts. Letter of Acceptance, Waiver, and Consent No. 2021070851501 (Aug. 31, 2023).
According to the AWC, from January of 2016 to March of 2022, FINRA found that Network 1 and Molinaro did not have a sufficient system for compliance, particularly in regard to FINRA Rule 2111 and the Care Obligation of Regulation Best Interest (Reg BI). These regulations are primarily concerned with the excessive trading practices and other self-serving misconduct to protect investors.
Thes securities broker dealer’s written supervision procedures, for which Molinaro was responsible starting in July of 2017, were found to be inadequately designed. Before then, the procedures did not have clear guidelines on how to uncover accounts that were being excessively traded, including lacking standards for turnover rates and cost-to-equity ratios. There was also no detailed guidance on what actions supervisors should take when such accounts were identified. These gaps in the procedures extended to the requirements of Reg BI.
Although Network 1 provided training on Reg BI, they were late in incorporating that regulation into their procedures, doing so only in March of 2021, eight months after the regulation’s effective date. Even after this late update, the supervision procedures were still lacking in specific steps for ensuring compliance.
Additionally, the securities broker dealer had a flawed system for flagging accounts that were excessively traded. While they obtained monthly reports and other exception reports that could indicate excessive trading, they largely ignored these reports until June of 2018. Instead, they relied on an internal report that focused on accounts generating the most commissions, neglecting certain accounts that might be facing commissions that were high relative to their equity value. Consequently, accounts were excessively traded, causing customers to incur excessive commission costs, without effective intervention from Network 1 or Molinaro.
Furthermore, even when the securities broker dealer identified problematic accounts and tried to restrict commissions, it was ineffective. This is because of the failure to limit the frequency or number of trades, allowing stockbrokers to continue excessive trading by simply executing more trades at lower commission rates. Consequently, restrictions on commissions were either ineffective or temporarily lifted, leading to ongoing high costs for the customers involved. Collectively, customers suffered more than $533,500.00 in trading costs and commissions.
Therefore, Network 1 and Molinaro violated FINRA Rules 2010 and 3110. Network 1 was censured and fined $200,000.00. Molinaro was fined $5,000.00 and suspended for three months from associating with any FINRA member in any principal capacity.
FINRA Public Disclosure shows that Molinaro has been identified in four customer initiated investment related disputes containing allegations of Molinaro misconduct while employed with securities broker dealers. On October 15, 2014, a customer filed an investment related FINRA securities arbitration claim involving Molinaro’s conduct in which the customer requested compensatory damages based upon allegations that Molinaro failed to supervise certain stockbrokers in connection with the recommendation and sale of securities when Molinaro was associated with Charles Vista LLC. FINRA Arbitration No. 13-02302.
Molinaro is also the subject of a customer initiated investment related FINRA securities arbitration claim in which the customer requested $1,300,000.00 in damages based upon allegations that Molinaro breached his fiduciary duties, breached a contract, made misrepresentations of material fact, engaged in unauthorized trading, made unsuitable recommendations, churned the customer’s account, and defrauded the customer when he was associated with Network 1. FINRA Arbitration No. 21-01289 (May 18, 2021).
On June 23, 2022, a different customer filed an investment related FINRA securities arbitration claim involving Molinaro’s conduct in which the customer requested $130,000.00 in damages based upon allegations that Molinaro failed to supervise certain stockbrokers, resulting in churning of the customer’s account, unauthorized trading, and fraud. FINRA Arbitration No. 22-01419.
Molinaro has been associated with Network 1 Financial Securities Inc. since February 19, 2014.
