FINRA Sanctions Investment Bank for Mutual Fund Transactions Violations

FINRA ordered an investment bank to pay more than $10 million in restitution for suitability violations relating to mutual fund transactions.

FINRA found that from January 2010 through June 2015, the bank's supervisory systems were not sufficient to prevent unsuitable switching. In particular, the firm incorrectly defined a mutual switch in its supervisory procedures to require three separate transactions within a certain time frame. Based on this incorrect definition, the bank (i) failed to act on thousands of automated alerts for potentially unsuitable transactions, (ii) excluded transactions from review for suitability and (iii) failed to ensure that disclosure letters were sent to customers regarding the transaction costs.

FINRA stated that 39% of the mutual fund transactions by the firm's customers were unsuitable as they were inconsistent with customers' investment objectives, stated risk tolerance and account holdings, or involved unsuitable short-term trading. FINRA also noted that "switching among certain fund types may be difficult to justify if the financial gain or investment objective to be achieved by the switch is undetermined by the transaction fees associated with the switch."

The bank was also disciplined for failing to provide applicable breakpoint discounts to certain customers.

The firm was censured and fined $3.75 million.

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