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Mutual Fund Sales Violations

Mutual fund sales practice violations are a common occurrence that many times goes undetected by investors. FINRA sales practice rule violations related to the sale of mutual funds has been a frequent source of FINRA arbitration claims over the years. Financial Advisors must recommend the mutual fund share class that is most suitable for the investor and not the share class which generates the greatest sales commission. Mutual fund investors can be purchased with a sales commission (load funds), with no sales commission (no-load), or a deferred sales commission (back-end load) with a contingent sales commission based on how long the mutual fund shares are held. In addition to sales commission differences, there are difference operating expenses and management fees which complicate the decision-making process. For inexperienced investors, these differences are difficult to understand which requires FINRA mutual fund sales practice rules to protect the investing public.

Mutual funds are designed to be long term investments which are to be held for a client’s entire investment time horizon. In some instances, a transaction between different mutual funds or different mutual fund families is considered suitable if it is a part of a bone fide asset allocation investment program. The recommendation of a mutual fund sale and purchase of another mutual fund can result in unintended taxes in a taxable investment account.

Mutual fund switching among mutual funds with similar investment objectives is usually a FINRA sales practice violation if it has no legitimate investment purpose and may needlessly impose a sales commission charge and increased tax liability on the customer. Mutual sales breakpoint violations occur when a brokerage firm and their financial advisor recommends that a customer purchase a mutual fund in an amount just below the sales commission breakpoint where the customer could pay a lower sales commission charge. The incentive to the brokerage firm and financial advisor is a bigger payday and less client funds invested for their benefit.

Mutual fund switching and mutual fund sales breakpoint violations are detailed in FINRA rules and regulations by (NASD Rule 2830):

The Silver Law Group can help you determine whether an investment loss is the result of a brokerage firm and their financial advisor’s violation of mutual fund switching or mutual fund sales breakpoint rules in an investment account. If an investor suffers losses as a result of mutual fund switching or mutual fund sales breakpoint violations they may be able recover their losses in a FINRA arbitration claim.

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