Regulation Best Interest in Action- What a Recent FINRA Complaint Reveals About Excessive Trading Risks

When Regulation Best Interest (Reg BI) went into effect in June 2020, it was designed to raise the standard of conduct for broker-dealers. At its core, Reg BI requires brokers to put their retail customers’ interests ahead of their own financial incentives.

A recent enforcement action filed by the Financial Industry Regulatory Authority (FINRA) offers a detailed look at how regulators evaluate excessive trading, supervisory failures, and Reg BI compliance—particularly when vulnerable investors are involved. At Sonn Law Group, our attorneys closely follow these developments as they provide critical insight into how regulators assess whether firms have met their federal obligations.

Overview of the FINRA Complaint

According to FINRA’s Department of Enforcement, the complaint alleges that between March 2020 and July 2021, a broker-dealer executed more than 2,200 trades in two accounts belonging to an 89-year-old retired investor.

The scale of the trading activity described in the regulatory filings is staggering:

• Nearly $3 million in trading costs.
• More than $1 million in realized losses;
• Annualized cost-to-equity ratios exceeding 40 percent;
• Turnover rates are far above levels typically associated with long-term investing.

FINRA alleges that the accounts would have needed to appreciate by extraordinary percentages simply to break even, making it virtually impossible for the strategy to align with the customer’s stated investment objectives and risk tolerance.

The “Smoking Guns”: Cost-to-Equity and Turnover Rates

Two metrics appear repeatedly in FINRA’s analysis: cost-to-equity ratios and turnover rates.

The cost-to-equity ratio measures how much an account must earn annually just to cover commissions and expenses. In this case, a ratio of 40% means the investor needed a 40% return just to stay at $0. The turnover rate reflects how frequently securities are bought and sold.

Regulators view high numbers in these categories as immediate red flags for “churning” or excessive trading. In this matter, FINRA alleges that securities were often bought and sold within weeks or even days, directly contradicting the customer’s objective of long-term growth.

Reg BI and the “Care Obligation”

Under Reg BI’s Care Obligation, brokers must exercise reasonable diligence, care, and skill. Crucially, this applies not only to individual trades but to a series of transactions taken together.

The FINRA complaint alleges that the cumulative effect of the trading was not in the customer’s best interest. Even if an individual trade seems defensible in a vacuum, a pattern of trading that generates massive commissions while depleting the investor’s principal violates the rule. Under Reg BI, the broker’s financial incentives (commissions and margin interest) must never take precedence over the investor’s interests.

Supervisory Failures: Ignoring the Red Flags

Beyond the broker’s actions, the complaint focuses heavily on the firm’s failure to supervise. FINRA rules require firms to maintain systems designed to detect and prevent misconduct. According to the complaint, several red flags went unaddressed:

• Large trading volumes and recurring losses.
• Cost-to-equity ratios are well above the 20 percent industry benchmark.
• Persistent “in-and-out” trading and frequent use of margin.
• Trading patterns are inconsistent with the client’s profile.

From a regulatory perspective, a firm’s failure to act on these warnings is just as significant as the underlying trading itself.

Heightened Scrutiny for Vulnerable Investors

While Reg BI applies to all retail customers, regulators pay heightened attention to cases involving elderly or retired investors. FINRA has emphasized that advanced age and a limited ability to recover losses increase the potential harm caused by high-cost strategies. In this enforcement narrative, the customer’s age and retirement status were central to the allegations of investor harm.

What Investors Can Learn

Although a FINRA complaint represents allegations rather than final findings, this case provides valuable lessons:

1. High trading costs matter. Frequent commissions can erase even the best market gains.
2. Activity must match goals. Rapid-fire trading is almost never consistent with a “long-term growth” objective.
3. Firms have a duty to intervene. A brokerage firm cannot simply stand by while an account is being depleted by commissions.

Sonn Law Group: Focused on Investor Protection

Sonn Law Group represents investors nationwide in securities arbitration and litigation involving unsuitable investments, excessive trading, and failures to supervise.

If you have noticed high trading volume in your account, or if you are concerned about the account activity of an elderly family member, we can help you review your statements for these red flags.

To read the full allegations, you can access the FINRA Disciplinary Database here.

If you have questions about your rights or potential recovery options, contact Sonn Law Group today for a free consultation.