Firm Violated Reg BI With Class A Mutual Fund Switches: FINRA

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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.

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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.