NYLIFE Securities Submits to Censure, Restitution, and Review of Supervisory Procedures After Allegations of Unsuitable Mutual Fund Switching Resulting in Investment Loss
NYLIFE Securities, LLC submitted a letter of acceptance, waiver, and consent to the Financial Regulatory Authority (FINRA) Department of Enforcement on October 25, 2021. The letter intended to settle allegations that NYLIFE Securities failed to establish, maintain, and enforce a supervisory system aligned with FINRA rules and suitability requirements related to mutual fund and cross-product switches. According to FINRA, NYLIFE Securities violated FINRA Rules 3110 and 2010 between January 2015 and March 2019.
Alleged Violations that Resulted in Investor Losses
Class A shares of mutual funds are typically suitable for long-term investors only because of the up-front costs related to their purchase and annual fees. Mutual fund switching is when a customer sells their shares and reinvests the proceeds in another mutual fund company. These transactions often result in additional charges and commissions. At NYLIFE Securities, the firm’s supervisory system and procedures were not designed or enforced to detect and prevent unsuitable mutual fund or cross-product switching.
From January 2015 through March 2019, NYLIFE Securities reviewed mutual fund switches weekly. It is alleged that the firm failed to take reasonable steps to review one of its broker’s recommended short-term trades of Class A mutual funds in ten customers’ accounts, many of which belonged to senior customers. Specifically, on hundreds of occasions between January 2015 and March 2019, this broker recommended that these ten customers buy and sell Class A mutual funds after holding the shares for short periods. These customers paid approximately $175,000 in unnecessary front-end sales charges for Class A mutual fund shares. The broker earned $116,000 in commissions.
While the NYLIFE Securities system flagged this broker’s mutual fund switches, the managing partner is alleged to have not had the necessary training and resources to review them. The firm’s compliance department closed its review upon the managing partner’s insufficient approval. There was a delay in reviewing flagged transactions, too, and later software upgrades resulted in incomplete reports related to cross-product switching.
Since then, the firm has voluntarily improved its oversight, controls, and compliance procedures related to mutual funds and cross-product switching. It carried out lookback reviews of previous transactions and paid restitution to customers affected by the broker in question, a total of $271,182 that covered front-end sales charges.
Sanctions on NYLIFE Securities
NYLIFE Securities, to settle the allegations of rule violations with FINRA and without admitting or denying the findings, accepts and consents to a censure and a $200,000 fine. The firm also commits to reviewing and updating its guides and training materials for managing partners and their delegates related to the firm’s mutual fund and cross-product switching supervision.
We Help Investors Recover Investment Losses
Financial advisors have a legal and regulatory obligation to recommend only suitable investments that are appropriate for their clients’ needs and objectives. Their employing brokerage firm has a legal and regulatory obligation to supervise the Financial Advisors’ sales practices and dealings with clients. To the extent any of these duties are breached, the customer may be entitled to a recovery of his or her investment losses.
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