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Regulation and Compliance > Federal Regulation > FINRA

NYLife Securities to Pay $263K Over Mutual Fund Switches

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What You Need to Know

  • As a result of supervisory failures, the firm failed to prevent several clients from being charged excessive, unnecessary fees, FINRA says.
  • One of its brokers had engaged in unsuitable mutual fund and cross-product switches, according to FINRA.
  • The firm agreed to pay a $200,000 fine and $63,347 in additional restitution to clients to settle the allegations.

NYLife Securities has agreed to pay a total of $263,347 to settle allegations that, as a result of supervisory failures, it failed to prevent several of its clients from being charged excessive, unnecessary fees after one of its brokers engaged in unsuitable mutual fund and cross-product switches, the Financial Industry Regulatory Authority said.

From January 2015 through March 2019, the firm “failed to establish, maintain and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with FINRA Rule 2111’s suitability requirements as it pertains to mutual fund and cross-product switches,” according to FINRA.

Without admitting or denying the industry self-regulator’s findings, NYLife Securities signed a FINRA letter of acceptance, waiver and consent on Sept. 30 in which it agreed to be censured and pay a $200,000 fine and restitution of $63,347. FINRA signed the letter on Monday.

NYLife Securities also agreed to review and update its Managing Partner Field Supervision Guide and the training module of managing partners and their delegates, relating to the firm’s mutual fund and cross-product switching supervision.

“Within no later than 120 days of the date of the notice of acceptance of the AWC, a senior officer and principal of NYLIFE Securities shall certify in writing to FINRA that the firm has updated the Guide and the training module to address unsuitable short-term trading of mutual funds and cross-product switching, with training to commence after the 120 day period,” according to the AWC letter.

The firm has “always acted in good faith and remain fully committed to providing the right tools and guidance to meet financial needs,” Kevin B. Maher, a spokesperson for parent company New York Life, told ThinkAdvisor by email on Tuesday. “We were able to work with FINRA to find a resolution that best serves our clients’ interests,” he added.

‘Broker A’ Cashed In

“On hundreds of occasions” between January 2015 and March 2019, a broker at the firm, identified only as “Broker A,” recommended that 10 clients buy and sell Class A mutual funds after holding the shares for short periods of time, according to the AWC letter.

“As a result of these short-term trades,” the clients paid about $175,000 in unnecessary front-end sales charges for Class A mutual fund shares, with Broker A earning about $116,000 in commissions, FINRA alleged.

Although the firm’s system flagged the transactions, that didn’t trigger supervisory oversight because the broker’s manager was not adequately trained in determining whether the fund switches were suitable and beneficial for clients, according to the AWC letter.

Another issue was that an April 2016 software upgrade caused incomplete information to flow from the firm’s client database to its mutual fund and cross-product switching reports, according to FINRA.

“During FINRA’s review, NYLIFE Securities voluntarily enhanced the firm’s procedures and controls concerning mutual fund and cross-product switching,” the AWC letter said.

The firm also “conducted extensive lookback reviews over multiple years to identify potentially overlooked switching activity; and paid restitution of $271,182 to Broker A customers, primarily consisting of front-end sales charges incurred by customers following the April 2016 software failure,” according to the letter.

The additional $63,347 in restitution ordered under the AWC agreement included front-end sales charges incurred by Broker A customers from January 2015 to April 2016 and sales charges that were “inadvertently omitted from the prior restitution payments,” FINRA explained in the letter.

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