NYLife Securities LLC a securities broker dealer headquartered in New York New York has been censured and fined $200,000.00 by Financial Industry Regulatory Authority (FINRA) supported by findings that it failed to create and implement a supervision system and written supervisory procedures relating to the suitability of mutual fund switching, resulting in unsuitable short-term trades in investor accounts. Letter of Acceptance Waiver and Consent No. 2017056197102 (October 25, 2021).
According to the AWC, between January of 2015 and March of 2019, the written supervisory procedures used by NYLife Securities contained a definition of mutual fund switching. The firm said that switching meant that proceeds from one mutual fund redemption would be used to purchase one or more other funds. The securities broker dealer warned stockbrokers that switching would be problematic if the costs exceeded the benefits to the customer.
NYLife Securities’ policy was to have mutual fund switches reviewed every week and for certain transactions to result in a letter to a customer regarding the transaction. Other measures taken to address switches included NYLife Securities flagging transactions for certain stockbrokers who caused at least five suspicious switches in a quarter. The stockbrokers’ supervisor was supposed to assess whether there was any benefit to the customer for the switch.
According to the AWC, there were no written supervisory procedures that explained how a mutual fund switch transaction was to be reviewed to determine whether it was suitable. There was no training provided to supervisors on making suitability determinations relating to switch transactions.
In cases where supervisors were tasked with reviewing transactions, they were provided with sales charge information on purchases but deprived of information about the costs and holding periods for the mutual fund shares that were sold. FINRA indicated that without having this critical information, there was no way for supervisors to determine if the customer’s account was exposed to short-term trades by stockbrokers. There was no way for the supervisors to identify how the transactions would financially impact the customer.
FINRA noted that NYLife Securities failed to supervise a particular stockbroker who made unsuitable recommendations. Customers of that stockbroker were advised to make short-term trades involving Class A mutual fund shares. Most of the customers who this stockbroker targeted were seniors. From January of 2015 to March of 2019, the customers were advised by the stockbroker to effect purchases and sales of Class A mutual funds after customers held the shares for short periods. Customers were collectively required to pay $175,000.00 in front-end sales charges. And the stockbroker who made these recommendations took in commissions of $116,000.00.
FINRA indicated that the stockbroker’s supervisor did not have sufficient training or tools to do suitability reviews. The supervisor was incapable of determining whether customers benefited from the stockbroker’s recommendations. FINRA also noted that when red flags were addressed, they were disregarded based on an unreasonable review by that supervisor.
The AWC also states that NYLife Securities failed to reasonably supervise cross-product switches. NYLife Securities referred in its procedures to cross-product switching as switching between products, such as selling a mutual fund to purchase an annuity, within a three month period. The securities broker dealer’s internal system problems resulted in its failure to identify 5,700 mutual fund transactions for supervisory review. The AWC stated that NYLife Securities failed to supervise 326 mutual fund switch transactions and 1,229 cross-product switch transactions for this reason.
FINRA found that NYLife Securities violated FINRA Rules 2010 and 3110 for failing to supervise.
