The Financial Industry Regulatory Authority has penalized Securities America, Inc. for violations involving Class A mutual fund recommendations.
In a news release, FINRA announced that it has ordered the firm to pay $2 million in restitution to its customers and pay a $1 million fine for failing to reasonably supervise recommendations that customers switch between mutual fund families or sell Class A mutual funds shortly after purchasing them.
FINRA states that 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. But the firm failed to implement a system 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 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,” according to FINRA. “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 authority said, Securities America 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. This caused customers to pay $2,019,040 in commissions and fees, which will now be returned to them.
“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.”
Securities America did not admit or deny the charges, but consented to the entry of FINRA’s findings. “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,” an Osaic spokesperson stated. “We remain committed to upholding the highest standards of integrity and acting in the best interest of clients.”
FINRA notes that Class A mutual fund shares typically collect a front-end sales charge when purchasing the fund, but the fee is normally waived when a customer exchanges a mutual fund for a new fund within the same fund family. In contrast Class C shares charge higher ongoing annual fees than Class A 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. When a Class A mutual fund is sold shortly after purchase, there is a risk that a customer has paid an upfront fee without holding the investment long enough to benefit from it.
The attorneys at Hyman Cotter PC have the experience to guide and advise you through any type of regulatory investigation. We were formally senior attorneys in the SEC’s Division of Enforcement who have represented clients in regulatory matters while working at Morgan Stanley and in private practice at some of the world’s largest law firms. If you are the subject of a regulatory proceeding, contact Hyman Cotter PC at 312-291-4600 or through our online contact form for a free consultation.
