Lombard Securities Inc., headquartered in Baltimore, Maryland, was censured and fined $50,000.00 by Financial Industry Regulatory Authority (FINRA) pursuant to an Order Accepting Offer of Settlement containing findings that the firm committed supervisory violations pertaining to mutual fund switches, uniform investment trusts (UITs), and non-traditional exchange traded funds (ETFs); and failed to provide customers with UIT discounts. Department of Enforcement v. Lombard Securities Incorporated, No. 2014038911101 (Mar. 22, 2016).
According to the Order, in a 2012 examination period, FINRA detected that the firm had not created, enforced, or sustained written supervisory procedures and other supervisory measures that were geared towards the prevention of unsuitable switching of mutual funds. The Order stated that FINRA’s guidance and Lombard’s written procedures called for stockbroker recommendations of mutual fund switching to be evaluated based upon the benefit or advantage provided to customers.
The Order indicated that the firm failed to have supervisory procedures in place to properly detect such mutual fund switches. FINRA found that the firm’s manual policies were inadequate, and failed to detect nearly all of the aforementioned mutual fund switches. Consequently, Lombard reportedly failed to provide switch letters to customers or notify Lombard’s compliance department pertaining to ninety-two switches that took placed in eighty-six client accounts.
FINRA noted that several red flags pertaining to mutual fund switching were present to the firm, namely: over eighty percent of the switches were unsolicited; many purchases and sales of funds occurred on the same trade date; and switches were occurring by transition from one mutual fund Class A share to another Class A share. FINRA found that the firm violated FINRA Rule 2010 and NASD Conduct Rule 3010 for supervisory failures in this regard.
The Order further stated that the firm failed to provide adequate supervision of sales pertaining to inverse, leveraged, and inverse-leveraged ETF products. The Order indicated that FINRA warned firms about the risks associated with such non-traditional ETFS; particularly, that such products called for firms to implement supervisory procedures to ensure that customers were suitable for the products. The firm apparently had no written supervisory procedures in place pertaining to the non-traditional exchange traded products.
The Order additionally stated that approximately eighteen inappropriate non-traditional ETF transactions were effected without detection by the firm. Such transactions apparently resulted in customers’ funds being overly concentrated in the funds, where affected customers were also subject to pro-longed holding periods. The Order stated that affected customers incurred investment losses as a consequence. FINRA found that the firm violated FINRA Rule 2010 and NASD Conduct Rule 3010 for supervisory failures in this regard.
The Order further indicated that the firm had not properly applied UIT discounts to customers that were eligible for such. The firm apparently failed to apply the discounts in seventy-four trades in an estimated fifty client accounts, which resulted in customers missing out on $25,000.00 in UIT discounts in the aggregate. FINRA found that the firm had violated FINRA Rule 2010 in this regard.
Finally, the firm apparently had no written supervisory procedures and policies in place to ensure that customers would receive the discounts on the UIT transactions. Consequently, FINRA found that the firm violated FINRA Rules 2010 and 4511, NASD Conduct Rule 3010, Securities Exchange Act of 1934 Section 17(a), as well as Rule 17-a4(b)(4).
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