Firm Violated Reg BI With Class A Mutual Fund Switches: FINRA
What You Need to Know
The short-term switches in Class A mutual funds violated Regulation Best Interest’s care obligation, FINRA says.
Class A mutual fund shares typically include substantial upfront sales charges and are only suitable as long-term investments.
A rep recommended and made 25 short-term switches in two seniors’ accounts, according to FINRA.
The Financial Industry Regulatory Authority has ordered Securities Research Inc. of Florida to pay a $60,000 fine and $49,253 in restitution plus interest for short-term switches in Class A mutual funds that violated Regulation Best Interest’s care obligation.
According to FINRA’s order, since at least July 2018, Securities Research “has failed to establish, maintain, and enforce a supervisory system, including written procedures, reasonably designed to achieve compliance with the suitability requirements” of FINRA Rule 2111 and the care obligation, as they pertain to short-term switches of Class A mutual funds.
Moreover, from July 2018 to November 2021, “the firm failed to reasonably supervise” short-term switches of Class A mutual funds by one of its registered reps in the accounts of two customers, who collectively paid $43,725 in excess sales charges, according to the order.
As FINRA explains, Class A mutual fund shares typically include substantial upfront sales charges, known as front-end loads, and “are generally suitable, or in the customer’s best interest, only as long-term investments and not for short-term trading, because an investor usually must hold the Class A share for a long period of time to recoup the front-end load.”
Mutual fund switching occurs when a customer sells mutual fund shares and reinvests the proceeds in another mutual fund, often incurring additional charges and commissions.
Between July 2018 and November 2021, the registered rep “recommended and effected 25 short-term switches that were unsuitable for or not in the best interest of two senior customers,” the order states.
