Brokers and financial advisors at times have used a transactional practice of “switching” mutual funds or variable annuities to boost commissions clients pay, and FINRA on Wednesday said it penalized a closed Osaic broker-dealer, Securities America Inc., $3 million for the behavior.
From January 2018 and June 2024, when it became part of Osaic Wealth Inc., Securities America oversaw its advisors’ purchase of approximately $3.8 billion in Class A mutual fund shares, which generated a substantial portion of the firm’s revenue, according to a statement by FINRA.
Such a lack of oversight of sales practices can lead to concerns from regulators.
According to the statement from FINRA on Wednesday, Securities America “failed to implement a system, including written policies and procedures, reasonably designed to supervise recommendations of Class A shares” that complied with industry suitability rules as well as Regulation Best Interest’s care obligation.
Switching clients’ mutual funds is well-established industry practice to generate commissions charged to clients.
“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,” according to FINRA. “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.”
At the time, Securities America had 3,400 registered reps and financial advisors and mutual fund A share sales accounted for 26% of the firm's revenue, according to FINRA.
In settling the matter, Securities America agreed to the entry of FINRA’s findings without admitting or denying the charges.
“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 wrote in an email. “We remain committed to upholding the highest standards of integrity and acting in the best interest of clients.”
Securities America will pay $2 million in restitution to clients and a fine of $1 million as part of the settlement, according to FINRA.
“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 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,” according to FINRA.
John S. Winslow, 57, was indicted just over a year ago for his scheme to steal from an elderly client.
Hamachi's new model portfolio partnership and an industry-first solution from Vestmark join the growing wave of AI tools for wealth managers.
Meanwhile, LPL attracted a five-advisor team managing $380 million in Kansas, while a veteran with stripes from Morgan Stanley, UBS, and Fidelity has joined Prime Capital Financial.
At Goldman Sachs’ RIA conference, Dynasty’s Shirl Penney said an AI clone trained on his emails and speeches could be the first of “hundreds of digital employees.”
The top-ranked RIA by total AUM continues to scale its wealth management arm, bringing its Pennsylvania presence to five offices.
As technical expertise becomes increasingly commoditized, advisors who can integrate strategy, relationships, and specialized expertise into a cohesive client experience will define the next era of wealth management
Growth may get the headlines, but in my experience, longevity is earned through structure, culture, and discipline
