Firm Fined for Reg BI Failures on Short-Term Mutual Fund Switches
Commentary by Jeff Ziesman
A firm settled FINRA charges for failing to establish and enforce supervisory systems designed to prevent unsuitable short-term trading of Class A mutual funds.
According to the AWC, the firm allowed one of its registered representatives to execute 25 short-term switches of Class A metal funds in the accounts of two senior customers, resulting in $43,724.87 in excess sales charges. FINRA explained that these types of mutual fund shares typically carry substantial upfront sales charges and are generally only suitable for long-term investments. FINRA found the switches were often made between different mutual fund families, increasing costs to customers without meaningful benefit.
FINRA also determined that the firm failed to ensure customers received sales charge waivers and fee rebates available through mutual fund exchange privileges and rights of reinstatement. FINRA found that 11 customers paid an additional $51,600.42 in excess sales charges and fees.
FINRA concluded that the firm violated FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade") as well as Exchange Act Rule 15l-1(a)(1) ("Regulation Best Interest").
To settle the charges, the firm agreed to (i) a censure, (ii) pay a $60,000 fine and (iii) pay $49,253.72 in restitution to affected customers, plus interest. The firm has since revised its supervisory procedures to prevent further violations.
Commentary
FINRA has been reviewing mutual fund switches, and firm supervisory systems relating to switches, for over 25 years. Regulators have stated that mutual fund shareholders must be given sales charge waivers, discounts and fee rebates when they are eligible. This case is a reminder that firms must have robust and up-to-date surveillance tools and procedures to ensure mutual fund shareholders receive appropriate mutual fund recommendations, fee waivers and discounts. FINRA will continue to order restitution to customers when the circumstances warrant such an order.