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

All of these switches were part of a pattern of switching between different mutual fund families.

“And while not part of any switch, in November 2021, at the representative’s recommendation, one of the two senior customers also sold Class A mutual fund shares that she had held for only a month.”

While the firm “manually flagged some of the short-term switches that the representative effected in these customers’ accounts,” FINRA states, “it largely confined its supervisory review to confirming that the customers had approved them.”

During the same time period, Securities Research “failed to provide 11 customer accounts with the mutual fund exchange privileges or rights-of-reinstatement benefits to which they were entitled. As a result, those customers paid $51,600.42 in excess sales charges and fees relating to 39 mutual fund exchanges.”

The order also found that since June 30, 2020, the firm has violated Exchange Act Rule 15l-1(a)(1) by failing to comply with the Compliance Obligation of Reg BI.

Since at least July 2018, FINRA also found that Securities Research has failed to establish, maintain and enforce a system, including written procedures, reasonably designed to supervise the application of:

• sales charge waivers to which customers are entitled through exchange privileges offered by mutual fund companies; and
• sales charge waivers and fee rebates to which customers are entitled through rights of reinstatement offered by mutual fund companies.