Crown Capital Securities L.P a securities broker dealer and investment advisory headquartered in Orange California has been censured and fined $75,000.00 by Financial Industry Regulatory Authority (FINRA) based upon the firm’s consent to findings that it neglected to supervise its business practices to adequately monitor the stockbrokers’ trading of mutual fund shares to determine if the transactions were suitable for customers. Letter of Acceptance Waiver and Consent No. 201403899062 (June 20, 2019).
According to the AWC, the firm was required under NASD Rule 3010(a) to create and maintain a supervisory system to monitor the trades placed by the stockbrokers to ensure that securities laws, FINRA and NASD Rules had been complied with. To this effect, the written supervisory procedures utilized by the firm mandated that its compliance associates rely on trading reports to discern abnormalities in trading or suspicious trading practices. Yet, the reports which the firm depended on did not evaluate transactions involving the switching of one mutual fund to another. Instead, the firm depended on the stockbrokers to provide the firm with a mutual fund switch for those transactions. The AWC stated the switch requests had to be authorized by a principal and customer before the transaction could be executed.
The AWC stated that the supervisory procedures which the firm used had been deficient because of the firm’s reliance on the stockbrokers to report the transactions. Without the stockbrokers reporting the transactions, there was no way for the firm to determine that the switch would occur. Additionally, the firm did not have a process in place by which the mutual fund switches could be reviewed by the appropriate personnel at the firm. Consequently, two of the stockbrokers at Crown Capital Securities L.P. engaged in switch transactions that lacked adequate supervision from the firm.
The AWC stated that in the case of one stockbroker, a total of sixty-one mutual fund switches had been effected on a short term basis. Evidently, a customer was steered by that stockbroker towards making Class A mutual fund purchases and then selling those positions prior to holding them for a full twelve months. The stockbroker purportedly advised the customer to use the proceeds for additional Class A mutual fund share purchases. Evidently, the firm’s procedures had been violated by the stockbroker by his execution of the switches, and there was no letter from the customer provided to the firm authorizing the transaction. Consequently, the customer had been assessed unwarranted sales loads and incurred more than $5,000.00 in losses.
The AWC further noted that a total of forty-nine mutual fund switches had been executed by the other stockbroker at Crown Capital. As was the case with the first stockbroker, the second stockbroker made these switches on a short term basis – nearly all of the positions had been held by customers for under a year before being liquidated. The AWC stated that this stockbroker also failed to comply with the policies of the firm calling for supervisory review and procurement of a customer’s authorization letter. Moreover, customers were constantly told to transition into new mutual funds which prompted some of them to pay sales charges of nearly six percent. Ultimately, customers whose accounts were affected by the second stockbroker’s improper transactions sustained an estimated $390,000.00 in losses.
FINRA found that the firm’s supervisory system and procedures were deficient or non-existent as it related to the review of stockbrokers’ mutual fund switch transactions. The AWC stated that the firm therefore neglected to comply with its supervisory duties meant to ensure that the transactions were suitable for customers. Consequently, FINRA found that the firm’s conduct was violative of FINRA Rule 2010 and NASD Rule 3010.
