Barclays Capital on Tuesday agreed to pay the Financial Industry Regulatory Authority $13.75 million in sanctions for suitability violations related to mutual fund transactions, including “switching.”
Without admitting or denying the charges, Barclays Capital agreed to pay more than $10 million in restitution, including interest, to affected customers for mutual fund-related suitability violations, and for failing to provide applicable breakpoint discounts to certain customers, which resulted in $800,000 in client losses. Barclays was also censured and fined $3.75 million.
LPL Financial had to pay FINRA nearly $12 million in May for mutual fund switching, among various other widespread violations.
In Barclays’ case, FINRA found that from January 2010 through June 2015, Barclays’ supervisory systems were not sufficient to prevent unsuitable switching or to meet certain of the firm’s obligations regarding the sale of mutual funds to retail brokerage customers.
In particular, Barclays “incorrectly defined a mutual fund switch in its supervisory procedures to require three separate transactions within a certain time frame,” FINRA states. Based on this incorrect definition, “Barclays failed to act on thousands of automated alerts for potentially unsuitable transactions, excluded transactions from review for suitability and failed to ensure that disclosure letters were sent to customers regarding the transaction costs.”
As a result, during the five-year period, there were more than 6,100 unsuitable mutual fund switches resulting in customer harm of approximately $8.63 million, according to FINRA.
“The proper supervision of mutual fund switching and breakpoint discounts is essential to the protection of retail mutual fund investors,” said Brad Bennett, FINRA’s chief of enforcement, in a statement.
FINRA points to NASD Notices to Members 94-16 and 95-80, which reminds broker-dealers of their obligation to ensure that any recommendation to switch mutual funds be evaluated with regard to the net investment advantage to the investor.
“Switching among certain fund types may be difficult to justify if the financial gain or investment objective to be achieved by the switch is undermined by the transaction fees associated with the switch,” FINRA notes. Switching among funds with similar investment objectives is generally a violation if it has no legitimate investment purpose and may needlessly impose another commission charge and increased tax liability on an investor.
FINRA also found that Barclays failed to provide adequate guidance to supervisors to ensure that mutual fund transactions for its retail brokerage customers were suitable based upon customer investment objectives, risk tolerance and account holdings.
During a six-month look back review, 1,723, or 39% of mutual fund transactions were found to be unsuitable, with 343 customers experiencing financial harm totaling more than $800,000, including realized losses, FINRA states. During the same five-year period, FINRA states that Barclays’ supervisory system “failed to ensure that purchases were properly aggregated so that eligible customers could be provided with breakpoint discounts.”
A six-month look back review found that the firm failed to provide eligible customers discounts in 98 Class A share mutual fund transactions.