A firm settled FINRA charges for (i) effecting unsuitable switches of Class A mutual fund shares that resulted in customer losses and (ii) failing to establish a supervisory system to monitor inappropriate rates of variable annuity exchanges.
In the Letter of Acceptance, Waiver and Consent, FINRA found that the firm engaged in short-term transactions of A share mutual funds in accounts held by customers who expressed investment objectives and investment time horizons incompatible with holding such mutual fund share positions for 12 months or less, in violation of FINRA Rule 2111 ("Suitability"). Additionally, the firm approved switch transactions before receiving switch letters from customers.
FINRA also found that (i) the firm relied on only two designated principals to surveil the firm's rates of variable annuity ("VA") exchanges, and (ii) the only tool available to the principals was the firm's VA blotter, which could not distinguish between VA exchanges and replacements. FINRA stated that it was "unreasonable to expect that the two designated principals could reasonably surveil all the VA applications . . . among its registered representatives without access to accurate historical data, systemic surveillance tools, or guidance from [the firm]." As a result, the firm violated FINRA Rule 2330 ("Members' Responsibilities regarding Deferred Variable Annuities").
In addition, FINRA found that the firm failed to timely (i) file disclosures concerning customer-related arbitrations involving its members, (ii) report written customer complaints and (iii) update current and former registered representatives' Forms U-4 and U-5. As a result, the firm violated FINRA Rule 4530 ("Reporting Requirements"), as well as FINRA By-Laws, Article V, Sections 2 ("Application for Registration") and 3 ("Notification by Member to the Corporation and Associated Person of Termination; Amendments to Notification").
The above conduct also constituted violations of FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principals of Trade").
To settle the charges, the firm agreed to (i) a censure, (ii) a $150,000 fine and (iii) $43,998.48 in restitution, plus interest.
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