Broker-Dealer Settles FINRA Charges as to Mutual Fund Switches

A broker-dealer settled FINRA charges for for failing "to establish, maintain, and enforce a supervisory system reasonably designed to supervise mutual fund and cross-product switches."

In a Letter of Acceptance, Waiver, and Consent, FINRA found that the firm "did not have written supervisory procedures or adequately train supervisors on how to determine whether the clients benefitted from the mutual fund switch transactions or whether the transactions were suitable." Further, FINRA stated that the firm's managing partners "could not independently determine if short-term trading was taking place in the customer’s account or assess the overall financial impact of the transactions to the customer." FINRA concluded that (i) "the firm’s supervisory system and procedures were not reasonably designed or enforced to detect and prevent unsuitable mutual fund switching," (ii) the firm failed to reasonably supervise a broker's mutual fund trading, and (iii) the firm "failed to maintain a reasonable surveillance system for mutual fund and cross-product switches."

As a result, FINRA determined that the broker-dealer violated FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade"). To settle the charges, the broker-dealer agreed to (i) a censure, (ii) a $200,000 fine, (iii) restitution in the amount of $63,347 and (iv) an undertaking to review the managing partners' training module.