Firm Settles FINRA Charges Over Class A Mutual Fund Supervision Violations

A broker-dealer settled charges for failing to reasonably supervise recommendations of Class A mutual fund switches and short-term sales.

According to the AWC, the firm's written supervisory procedures provided only discretionary guidance for supervising Class A mutual fund switches and short-term sales. FINRA determined that the firm (i) failed to require representatives to consider same-family exchange alternatives that would waive front-end sales charges, (ii) provided no criteria for supervisors to evaluate switch letters, and (iii) waived switch letter requirements entirely for purchases at net asset value, despite potential new contingent deferred sales charges.

FINRA also found that the firm's automated alert system malfunctioned due to a vendor error, generating alerts only for same-day sale and purchase events rather than the intended 90-day lookback period. As a result, the firm failed to identify thousands of Class A switches.

FINRA said the firm also lacked processes to verify that representatives obtained signed switch letters, with approximately 45 percent of flagged switches lacking signed letters. FINRA found that the firm categorically excluded substantial numbers of short-term sales from supervisory review, including all short-term sales where accounts had less than $1,000 in commissions in a single month, all short-term sales of positions purchased at Net Asset Value ("NAV"), and all short-term sales of positions purchased at other firms.

FINRA found that more than 1,000 Class A mutual fund switches and more than 2,000 short-term sales were not reasonably supervised and were potentially unsuitable or not in the retail customer's best interest. The firm effected approximately $3.8 billion in Class A mutual fund purchases during the relevant period. FINRA determined that the trades collectively caused customers to pay $2,019,040 in commissions and fees.

FINRA concluded that the firm violated FINRA Rules 3110(a) ("Supervisory Systems") and 3110(b) ("Written Procedures") from January 1, 2018 to June 14, 2024 by failing to maintain a supervisory system reasonably designed to achieve compliance with FINRA Rule 2111 ("Suitability"). From June 30, 2020 to June 14, 2024, the firm violated Exchange Act Rule 15l-1(a)(1) ("Best Interest Obligation") and Exchange Act Rule 15l-1(a)(2)(iv) ("Compliance Obligation"). FINRA also found that the violations constituted violations of FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").

To settle the matter, FINRA imposed a censure, a $1,000,000 fine, and ordered restitution of $2,019,040 plus interest. The firm must submit proof of restitution payments or documented restitution efforts within 120 days.