Although Reg BI is a Securities and Exchange Commission rule as of June 2020, Finra said that its position is that existing Finra rules are in alignment with the SEC.
“A violation of Reg BI also is a violation of FINRA Rule 2010, which requires associated persons to ‘observe high standards of commercial honor and just and equitable principles of trade’ in the conduct of their business,” agency stated.
Finra explained that two of the aspects of trading it will look at in determining a violation include a turnover rate of six or a cost-to-equity ratio about 20%, and in-and-out trading, both of which are not in a customer’s best interest and both of which were present in the Malico case.
“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,” the agency concluded.
As of July of this year, investors had filed 37 Reg BI claims against brokers in Finra arbitration.