Firm Failed to Reasonably Supervise Recommendations That Customers Switch Between Mutual Fund Families or Sell Class A Mutual Funds Shortly After Purchasing Them

FINRA has ordered Securities America, Inc. to pay $2 million in restitution to its customers and has fined the firm $1 million for failing to reasonably supervise Class A mutual fund recommendations, resulting in customers paying unnecessary fees through recommendations that were potentially unsuitable or not in customers’ best interest.

“Firms have a fundamental obligation to supervise their representatives’ recommendations and ensure they serve their customers’ best interests,” said Bill St. Louis, Executive Vice President and Head of Enforcement at FINRA. “When firms fail to supervise mutual fund recommendations, investors pay the price through unnecessary fees and charges. This $2 million in restitution will make affected customers whole, but prevention should always be the priority.”

Between January 2018 and June 2024, when it became part of Osaic Wealth, Inc., Securities America effected the purchase of approximately $3.8 billion in Class A mutual fund shares, which generated a substantial portion of the firm’s revenue. Nonetheless, the firm failed to implement a system, including written policies and procedures, reasonably designed to supervise recommendations of Class A shares for compliance with FINRA Rule 2111 (Suitability) and Regulation Best Interest’s Care Obligation. The Care Obligation requires broker-dealers and associated persons to exercise reasonable diligence, care and skill when making recommendations to retail customers.

Securities America’s supervisory system was not reasonably designed to detect switches and short-term sales. Even when the firm identified such trades, the firm failed to reasonably review them to ensure that representatives had reasonably considered fees and commissions. As a result, the firm failed to reasonably supervise recommendations of more than 1,000 Class A mutual fund switches and more than 2,000 short-term sales that were potentially unsuitable or not in the customer’s best interest. Collectively, these trades caused customers to pay $2,019,040 in commissions and fees, which will now be returned to them. This matter originated from a FINRA cycle examination.

Mutual funds offer different share classes, each with its own fee structure. Class A mutual fund shares typically collect a front-end sales charge when purchasing the fund, but this fee is typically waived when a customer exchanges a mutual fund for a new fund within the same fund family. Class C shares, by contrast, charge higher ongoing annual fees than Class A shares but typically have no upfront load.

When a representative recommends switching from one fund family to another, the customer pays a new front-end sales charge on Class A shares—a cost that could be avoided by staying within the original fund family. Similarly, selling a Class A mutual fund shortly after buying it creates a risk that a customer has paid an upfront fee without holding the investment long enough to benefit from it.

In settling this matter, Securities America consented to the entry of FINRA’s findings, without admitting or denying the charges.

FINRA makes available disciplinary actions and other information on its Disciplinary Actions Online database. In addition, FINRA publishes on its Monthly Disciplinary Actions page a summary of disciplinary actions against firms and individuals for violations of FINRA rules; federal securities laws, rules and regulations; and the rules of the Municipal Securities Rulemaking Board. FINRA’s use of fine monies is limited to specific purposes set forth in its public Financial Guiding Principles, which are approved by its Board of Governors. FINRA publicly itemizes and discloses how it uses fine monies each year.

About FINRA

FINRA is a not-for-profit organization dedicated to investor protection and market integrity. FINRA regulates one critical part of the securities industry—member brokerage firms doing business in the U.S. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

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