Improper mutual fund switching and failing to provide mutual fund sales breakpoints can constitute violations of the Financial Industry Regulatory Authority (FINRA). These violations can lead to FINRA arbitration claims, which can result in significant damages being assessed against stockbrokers and financial advisors. Further, these violations can lead to financial loss for investors.
Switching and Breakpoint Violations
Mutual funds are an investment made up of funds that are collected from several investors that are used in order to invest in securities such as stocks, bonds, money market instruments, and similar assets. They are operated by money managers who invest the fund’s capital with the goal of producing capital gains for the investors of the funds. Mutual funds provide investment diversity for an investor, without having to purchase stock from several companies.
Switching from one mutual fund to another with no legitimate investment purpose for the switch is prohibited by FINRA rules. This type of transaction is often used to create needless commission charges. Further, increased tax liability for the investor may result as a consequence of these transactions. Mutual fund switching may also result in churning or excessive trading, which are also serious violations of FINRA rules. This often occurs if there is a continuous purchase and sale of mutual fund shares from different fund families.
Mutual funds are intended to be long-term investments. Because of this, they are not intended to be traded frequently, like an investor may do with individual stock. As a result, sale breakpoints may be an indication of a conflict of interest by the investment broker, unless the investments in the portfolio are part of a bona fide asset allocation program. The sale breakpoint is the amount at which a sale of a mutual fund can be sold that allows an investor to move into a lower sales charge bracket. A sale that occurs just below the breakpoint is a violation of FINRA rules. An asset allocation program allows an investor to select a predetermined mix of investments that are best for the investor’s risk profile.
Violations of FINRA
FINRA sales violations can result in actions that penalize stockbrokers and the firms they work for. In addition, investors harmed by broker misconduct can recover damages. One way in which investors can make claims against brokers who have potentially committed misconduct is through FINRA’s arbitration process. Arbitration involves the use of an independent third party to resolve disputes. Under FINRA’s arbitration system, a panel of up to three, depending on the size of the claim, will hear both parties involved in the dispute and issue a decision. In 2014, FINRA assessed $134 million in fines and ordered $32.3 million in restitution to be paid to investors harmed as a result of broker misconduct.
Arbitration is just one way in which stockbrokers can be held responsible for their conduct. For more information about the remedies available for FINRA rules violations, you should speak with an experienced securities law attorney today. At the Silver Law Group, we have represented numerous individuals with their FINRA arbitration claims. We look forward to putting that knowledge and expertise to work for you.