The Financial Industry Regulatory Authority said Wednesday that it has fined Osaic Wealth $1 million and ordered the firm to pay $2 million in restitution for the failures of its former Securities America unit to reasonably supervise Class A mutual fund recommendations, which resulted in customers paying more than $2 million in fees through recommendations that were potentially unsuitable or not in customers’ best interest.
“Firms have a fundamental obligation to supervise their representatives’ recommendations and ensure they serve their customers’ best interests,” Bill St. Louis, executive vice president and head of enforcement, said Wednesday in a statement. “When firms fail to supervise mutual fund recommendations, investors pay the price through unnecessary fees and charges. This $2 million in restitution will make affected customers whole, but prevention should always be the priority.”
According to FINRA's order, between January 2018 and June 2024, when Securities America became part of Osaic Wealth, the BD effected the purchase of approximately $3.8 billion in Class A mutual fund shares, which generated a substantial portion of the firm’s revenue.
"Nonetheless, the firm failed to implement a system, including written policies and procedures, reasonably designed to supervise recommendations of Class A shares for compliance with FINRA Rule 2111 (Suitability) and Regulation Best Interest’s Care Obligation," the order states.
The Care Obligation requires broker-dealers and associated persons to exercise reasonable diligence, care and skill when making recommendations to retail customers.
Securities America’s supervisory system was not reasonably designed to detect switches and short-term sales, FINRA said.
"Even when the firm identified such trades, the firm failed to reasonably review them to ensure that representatives had reasonably considered fees and commissions," the order states.
As a result, FINRA said, 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.
"Collectively, these trades caused customers to pay $2,019,040 in commissions and fees, which will now be returned to them," FINRA said.
Class A mutual fund shares typically collect a front-end sales charge when purchasing the fund, but this fee is typically waived when a customer exchanges a mutual fund for a new fund within the same fund family, FINRA states. Class C shares, by contrast, charge higher ongoing annual fees than Class A shares but typically have no upfront load.
"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," FINRA said. "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."
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