FINRA Censures & Fines NYLIFE Securities for Supervisory Failures with Mutual Fund Switching
According to the Financial Industry Regulatory (FINRA), the regulator has censured and fined NYLIFE Securities (CRD No. 5167) $200,000 for supervisory failures in connection with mutual fund sales. The firm has also reportedly agreed to pay restitution of $63,347 and to review and update its supervision guide and training module.
From January 2015 through March 2019, NYLIFE Securities allegedly failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with FINRA’ s suitability requirements in connection with mutual fund and cross-product switches.
FINRA Rules requires that NYLIFE Securities and other FINRA members establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.
FINRA members are also required to establish, maintain, and enforce written procedures to supervise the types of business in which they engage and the activities of their associated persons.
Member firms or their associated persons must have a reasonable basis to believe that a recommended securities transaction or investment strategy is suitable for the customer, based on information obtained from the customer’s investment profile, according to FINRA rules.
Short-term Trading in Class A Mutual funds may be Unsuitable
Mutual funds have several classes of shares. Class A shares usually include an initial or “front-end” sales charge levied upon the purchase of shares, as well as annual, ongoing distribution and service fees that are typically 0.25 percent, according to FINRA.
The majority of the front-end charge is paid to the selling broker-dealer as a concession. Class A mutual fund shares are intended to be held long-term because there are significant upfront costs associated with the purchase of these products. A recommendation that an investor engage in short-term trading in Class A shares is potentially unsuitable because of these significant upfront costs. Mutual fund switching occurs when a customer sells mutual fund shares and reinvests the proceeds in another mutual fund company, often incurring additional charges and commissions.
Failure to Supervise Mutual Fund Trading
According to FINRA’s findings, NYLIFE reportedly failed to take reasonable steps to review a representative when he recommended short-term trades of Class A mutual funds in ten clients’ accounts, many of whom were seniors.
Specifically, on hundreds of occasions between January 2015 and March 2019, this representative recommended that these ten customers buy and sell Class A mutual funds after holding the shares for short periods of time. As a result of these short-term trades, the ten customers paid approximately $175,000 in unnecessary front-end sales charges for Class A mutual fund shares, with the broker reportedly earning approximately $116,000 in commissions.
NYLIFE reportedly consented to the sanctions of a censure and $200,000 fine and will pay restitution. The firm has also agreed to review and update its supervision guide and training module.
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