The Financial Industry Regulatory Authority Inc. this week reached a settlement and levied a $210,000 fine with midsize broker-dealer Kovack Securities Inc. over the firm's supervision of trades of mutual fund A shares, which are designed to be long-term investments.
Kovack Securities is based in Fort Lauderdale, Florida, and has close to 380 retail registered reps and financial advisers under its roof.
According to the Finra settlement, which was released Wednesday, for two years, Kovack failed to establish or enforce a supervisory system, including written procedures, reasonably designed to achieve compliance with Finra's suitability rule as it pertains to short-term trading of mutual fund class A shares.
The firm accepted Finra's finding without admission or denial, according to the settlement.
"The adviser in question was terminated in 2017 and subsequently barred from the industry," a Kovack Securities spokesperson wrote in an email. "Upon being alerted, the firm made full voluntary restitution to the eight affected customer accounts."
Class A mutual fund shares typically include upfront sales charges, known as front-end loads. They generally are suitable only as long-term investments and not short-term trading vehicles because an investor usually must hold an A share for several years to account for the front-end load. according to Finra.
From March 2015 to May 2017, while registered with Kovack Securities, one unnamed rep engaged in a pattern of short-term trading of A share mutual funds in 11 accounts of eight customers, including five seniors, according to Finra. The rep's employment history indicated that he had been fired from his previous broker-dealer while under review for short-term mutual fund trading, according to Finra, and warranted special or "heightened" supervision.
In total, the Kovack rep recommended over $2.1 million in A share mutual fund purchases to the eight Kovack customers after previously recommending sales to the same customers in the prior year, according to Finra. This activity caused the customers to incur unnecessary sales charges.
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