Barclay’s Capital, Inc., headquartered in New York, New York, was censured and fined $3,750,000 after consenting to findings that the firm had inadequate supervisory systems and written supervisory procedures for supervising the sale of mutual funds to retail brokerage customers. Letter of Acceptance, Waiver and Consent, No. 2015044544001 (Dec. 18, 2015).
According to the AWC, from January 1, 2010 through June 30, 2015, Barclays had inadequate supervisory systems and written supervisory procedures for supervising the sale of mutual funds to retail brokerage customers. For at least five years, the Firm reportedly failed to provide adequate supervisory guidance for ensuring the suitability of mutual fund transactions; incorrectly defined a mutual fund witch; failed to identify unsuitable mutual fund transactions, including, but not limited to, switches; failed to notify customer(s) of the costs associated with switches; and failed to have a centralized system in place to aggregate or household mutual fund purchases to ensure customers received available mutual fund breakpoint discounts.
The AWC indicated that for the six-month look back period, the firm had identified 1,723 (39%) of the 4,409 mutual fund transactions by Barclays’ brokerage customers to be unsuitable. The firm had reportedly recommended transactions that were unsuitable as they were inconsistent with the customer’s stated risk tolerance, investment objectives or the customer’s account holdings, or involved unsuitable short-term trading. FINRA found that 343 of the unsuitable transactions had resulted in customer harm, including realized losses, totaling $818,551. As a result of the aforementioned conduct, Barclay’s was found to have violated Rules 2111(a) and 2010.
The AWC further indicated that from at least January 2010 through March 2015, the firm’s written compliance policies and supervisory procedures, for its retail brokerage business, incorrectly defined a mutual fund switch to require three separate mutual fund transactions within a certain time frame. FINRA found that the firm had correctly identified thousands of potential switches, but then closed out such alerts and excluded transactions from consideration as switches based upon the firm’s incorrect switch definition. The firm reportedly failed to review thousands of switches for suitability and failed to ensure that disclosure letters were sent to customers concerning the transactions costs.
According to the AWC, through June 2015, Barclays had generated 8,008 switch alerts. Yet, the firm reportedly only sent 155 disclosure letters, and 91% of which did not disclose the costs associated with the switches. Finally, the firm found that it failed to provide eligible customers with applicable ROA discounts in connection with 98 Class A share mutual funds transactions. FINRA found that the firm had a duty to provide its customers with such discounts, and by failing to do so, the firm violated Rule 2010.
The AWC reported that as a result of the deficiencies, the firm had conducted look back reviews. For the relevant period, the firm had identified over 6,100 unsuitable mutual fund switches. The AWC further stated that from March – August 2014, the firm had identified over 340 unsuitable mutual fund transactions and 98 missed breakpoint discounts.
FINRA found that as a result of the aforementioned conduct, Barclays had violated NASD Rules 2310(a), 3010(a) and (b) and FINRA Rules 2010, 2111(a), 3110(a) and (b). In resolving the matter, Barclays will pay a reported a $10,000,000 in restitution relating to the firm’s look back reviews and any additional restitution amounts as identified in connection with various undertakings.
Securities brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of suitability, unauthorized trading, or excessive activity. FINRA Conduct Rule 3010 specifically provides that each member shall establish and maintain a system to supervise the activities of each Stockbroker and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association. Final responsibility for proper supervision rests with the member.
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