FINRA Sanctions Cambridge Investment Research for Alleged Supervisory Issues

According to the FINRA Disciplinary report for February 2020, Cambridge Investment Research (CRD #39543, Fairfield, Iowa) was issued an AWC on December 31, 2019 in which the firm was censured and fined $150,000. According to FINRA, the firm allegedly failed to reasonably supervise short-term trading of UITs and mutual fund Class A shares.

The findings stated that the firm purportedly relied on an automated trade surveillance system as part of its system for identifying potentially unsuitable short-term trading or switch transactions in long-term products. The system allegedly generated alerts that required principal review of certain potential mutual fund and UIT switch transactions. However, the firm allegedly failed to provide sufficient guidance for principals to follow when an alert was generated.

As a result, the firm’s principals were reportedly inconsistent in following up on the alerts, such as by contacting customers to inquire about the reasons for the transactions to ensure that the customers understood the consequences of such transactions.

The alleged lack of sufficient guidance to firm principals allowed at least one of its representatives to purportedly engage in unsuitable short-term trading in mutual fund Class A shares.

Furthermore, the firm reportedly required its Office of Supervisory Jurisdiction supervisors to ensure that customers signed letters to acknowledge switch transactions that triggered the alert. Unfortunately, these letters allegedly were not always sent to customers after their transactions triggered the alert. During branch inspections the firm reportedly failed to identify that, in some cases, supervisors failed to obtain signed switch letters from customers.

FINRA’s findings also stated that the firm monitored commissions through an alert in its automated trade surveillance system. However, this system was purportedly not reasonably designed to achieve compliance with FINRA’s rules prohibiting the charging of excessive commissions because supervisors did not review transactions that triggered that alert unless the trade generated other alerts in addition to the alert for excess commissions.

It  was reportedly not until later that the firm adjusted its excess commission alert so that a supervisor reviewed each trade flagged for potential excess commission charges. Due to the delay, firm representatives executed transactions that allegedly resulted in $17,124 in excess commissions on trades entered by firm representatives, and a single trade in which the commission amount of $25,000 was entered in error.

After FINRA identified these excess commissions, the firm reportedly reimbursed its customers for those charges. The findings also included that the firm failed to identify and apply available breakpoint discounts for eligible customers.

According to the AWC, the firm also reportedly identified multiple transactions that resulted in customer overcharges of $27,849 and reimbursed customers for these commission overcharges.

For FINRA’s full findings see FINRA Case #2017052543601.

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