SW Financial is a brokerage firm headquartered in Melville New York which has been censured and fined thirty-five thousand dollars by Financial Industry Regulatory Authority (FINRA) based upon consenting to findings that the firm (1) made mutual fund recommendations that were not suitable for customers and (2) failed to supervise the firm’s investment recommendations to customers. Letter of Acceptance Waiver and Consent No. 2015043645102 (Feb. 27 2018).
According to the AWC, in April of 2015, the firm’s registered representative, LF, was responsible for servicing the individual retirement account of a senior customer, HR. Apparently, in May of 2015, HR communicated to the firm that he intended to invest on a short term basis and sought to preserve capital during that time in anticipation of retirement.
The AWC stated in May of 2015, HR’s outside mutual fund holdings were transferred to the individual retirement account at SW Financial. Evidently, those holdings were liquidated three days after arrival according to the recommendations LF made to HR. LF then facilitated HR’s $865,000.00 in proceeds to be used to buy fourteen separate mutual funds belonging to twelve separate families of mutual funds.
FINRA concluded that LF’s recommendations concerning the mutual fund switches had been unsuitable, as the funds recommended by LF carried goals of growth and appreciation rather than preservation of capital. Additionally, the recommendations were not suitable because of HR having a short-term investment horizon; the class A shares were designed for investors with longer-term investment horizons. Finally, FINRA noted that LF precluded the customer from obtaining breakpoint discounts by HR having purchased funds belonging to twelve separate families of mutual funds.
The AWC additionally revealed that the firm failed to supervise the recommendations made by stockbrokers to customers. Particularly, the firm appointed GW as the principal to supervise recommendations of mutual funds. Apparently; however, GW did not comprehend how mutual funds worked, so he was unable to adequately perform his supervisory duties. For example, GW reportedly failed to comprehend how high up-front costs affected suitability of transactions and did not know about breakpoint discounts.
GW seemingly failed to make sure that HR’s objectives for investing conservatively matched up with the objectives of the funds that LF recommended for HR. GW also reportedly failed to determine whether class A mutual fund shares were appropriate given the shorter term investment horizon communicated by HR or ensure that HR was able to take advantage of breakpoint discounts that were available to him.
FINRA further revealed that the firm did not make sure that the switch letters provided to HR by LF contained the sales charge information for the funds that LF recommended HR switch into. Moreover, the firm’s written supervisory procedures reportedly failed to educate stockbrokers on how to go about determinations of suitability for mutual funds. Consequently, FINRA found that the firm’s conduct was violative of FINRA Rules 2010 and 3110.
This is not the first time that SW Financial has been sanctioned by FINRA for supervisory failures. Particularly, the firm was censured and fined $30,000.00 by FINRA based upon the firm’s consent to findings that it made exchange traded funds recommendations that were not suitable for customers and neglected to create and implement supervision systems and written supervisory procedures for adequate monitoring of inverse, leveraged and inverse-leveraged exchange traded funds. Letter of Acceptance, Waiver and Consent, No. 2010022290801 (Apr. 30, 2014). FINRA found that the firm’s conduct in that regard was violative of FINRA Rule 2010 as well as National Association of Securities Dealers (NASD) Rules 2310, 2110 and 3010.
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