According to FINRA, Nicholas Michael Caruso was suspended from association with any FINRA member in all capacities for three months (with no monetary sanctions due to financial status) for willfully violating the Best Interest Obligation under Regulation Best Interest (Reg BI) by recommending a series of transactions in two elderly retail customers' accounts that was excessive in light of their investment profiles and therefore was not in either customer's best interest. Caruso placed his and his member firm's interests ahead of the interests of both customers.
Regulation Best Interest, which became effective in June 2020, requires broker-dealers and their associated persons to act in the best interest of retail customers when making recommendations. This includes an obligation of care requiring brokers to understand the potential risks, rewards, and costs associated with a recommendation and to have a reasonable basis to believe the recommendation is in the customer's best interest. Caruso's recommendations violated these obligations through a pattern of excessive, short-term trading.
Caruso's recommendations for both customers involved a pattern of in-and-out, short-term trading, and he failed to consider the cumulative costs of his trading strategy. In-and-out trading, where securities are purchased and sold within short time periods, can generate significant commissions while providing little or no benefit to customers. The customers lost a total of $20,300 and paid more than $14,100 in commissions and trade costs. The combination of losses and high costs demonstrates that the trading was not serving the customers' interests but was instead generating income for Caruso and his firm.
The fact that both customers were elderly makes this violation particularly egregious. Elderly investors often have limited ability to recover from losses and may be on fixed incomes, making excessive trading costs especially harmful. Seniors may also be less able to monitor their accounts closely or to fully understand the impact of frequent trading on their investment returns. For investors, particularly seniors, this case highlights the protections provided by Regulation Best Interest and the importance of monitoring trading activity for patterns that suggest the broker's interests are being prioritized over the customer's interests. Warning signs include frequent trading that generates substantial commissions, short-term in-and-out trading, trading that seems inconsistent with stated investment objectives, and declining account values despite market conditions. Investors should review monthly or quarterly statements carefully, calculate the total costs being paid in commissions and fees, and question any trading patterns that seem excessive. Regulation Best Interest provides a legal framework for holding brokers accountable when they prioritize their own compensation over customer interests, and investors should not hesitate to file complaints when they suspect violations.
