Osaic Wealth has been penalized by regulators over violations that resulted in clients being overcharged for mutual fund fees, according to Advisor Hub.
The Financial Industry Regulatory Authority censured Osaic and ordered the firm to pay $3 million over allegations that its former Securities America unit failed to properly supervise trades of Class A mutual funds.
FINRA found that Securities America did not have a supervisory system, including written supervisory procedures (WSPs), to achieve compliance with FINRA Rule 2111 and the Care Obligation of Rule 15l-1 of the Securities Exchange Act of 1934 (Reg BI) with respect to Class A mutual fund recommendations.
FINRA Rule 2111 says in part, that a member must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. The Care Obligation requires broker-dealers and associated persons to exercise reasonable diligence, care and skill when making recommendations to retail customers.
“Between January 1, 2018, and June 14, 2024, Securities America effected the purchase of approximately $3.8 billion in Class A mutual funds, which comprised a substantial portion of the firm’s revenue,” according to FINRA’s letter of acceptance, waiver and consent. “However, from at least January 2018 to June 14, 2024,Securities America failed to establish, maintain, and enforce a supervisory system, including WSPs, reasonably designed to achieve compliance with FINRA Rule 2111 and Reg BI with respect to recommendations that customers (a) switch Class A mutual fund holdings between fund families (“switching”) and/or (b) sell Class A mutual funds after holding them for a short period (“short-term sales”).
FINRA determined that Securities America’s supervisory system was not reasonably designed to detect switches and short-term sales, adding that even when these trades were identified, the firm failed to reasonably review them to ensure that representatives had reasonably considered fees and commissions.
This resulted in Securities America failing to 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. These trades caused customers to pay $2,019,040 in commissions and fees.
FINRA ordered $2 million to be paid in restitution to customers and a $1 million fine.
“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.”
The supervisory failures were blamed on a lack of reasonable guidance to supervisors and brokers for assessing whether mutual fund sales were in the customer’s best interest as well as deficiencies in Securities America’s automated alert and detection systems,
Osaic, which was previously called Advisor Group, acquired Securities America through its 2020 purchase of Ladenburg Thalmann. The firm did not admit or deny FINRA’s findings but accepted the penalties.
FINRA said it uncovered the issues during a routine examination and that the problems were resolved when Securities America migrated onto the Osaic supervisory platform last year.
Osaic agreed to the settlement “to resolve this legacy matter that occurred at Securities America prior to their integration,” an Osaic spokesperson said in an emailed response, adding that, “We take regulatory compliance seriously and have taken measures to ensure our policies, training and supervisory procedures continue to be designed to protect clients and prevent further issues.”
The attorneys at Hyman Cotter PC understand the complexities that come with being the subject of a regulatory inquiry by the SEC, FINRA, and other self-regulatory organizations, and we have the experience to guide and advise you through any type of regulatory investigation. If you are the subject of a regulatory proceeding, contact us at 312-291-4600 or through our online contact form for a free consultation.
