|Thursday, October 16, 2008
Nancy Condon (202) 728-8379
Herb Perone (202) 728-8464
Washington, DC — FINRA announced today that it imposed a $1.1 million fine on Banorte Securities International, Ltd. for unsuitable sales of Class B shares in off-shore mutual funds as well as failing to have adequate supervisory systems to monitor those sales.
As part of this settlement, the firm agreed to a remediation plan that will address over 1,400 transactions in the accounts of more than 300 customer households. Banorte Securities International, which is headquartered in New York, is part of an affiliated group of companies that includes a Mexican broker-dealer and a Mexican bank. The majority of the firm's customers live in Mexico.
"Firms have a suitability obligation to consider all relevant factors when recommending mutual fund investments to customers, whether those customers live inside or outside of the United States. That means that firms must consider all available share classes and pricing features in determining what is most advantageous to the customer," said Susan L. Merrill, Executive Vice President and Chief of Enforcement. "Banorte Securities International failed to ensure that their sales force and customers understood the impact that share class pricing had on investment performance. As a result, customers often missed the opportunity to take advantage of the lower costs available with Class A shares."
In recommending the purchase of mutual funds, off-shore or domestic, a firm must determine the suitability of the class of shares to be purchased as well as the suitability of the particular fund. Primary considerations for share class suitability include the investment amount, the expected term of the investment, the applicable sales loads, fees and expenses associated with each class of shares. These factors affect the total return on the investment to the customer.
Mutual funds have different classes of shares representing interests in the same portfolio of securities, but differing in the structure and amount of sales charges paid directly by shareholders as well as the continuous, assets-based fees assessed on each shareholder's investment. Class A shares generally charge a front-end sales charge and impose on-going asset-based fees that are generally lower than the asset-based fees imposed by Class B shares. Class B shares typically do not charge a front-end sales charge, but they do impose asset-based fees that are generally higher than those associated with Class A shares. Class B shares also impose a declining contingent deferred sales charge for a period of time.
FINRA found that Banorte Securities International recommended Class B shares of off-shore mutual funds to its customers in certain transactions where the customers would have financially benefited from purchasing Class A shares - particularly since the firm had negotiated lower front-end sales charges for off-shore mutual fund Class A shares with several mutual fund companies. FINRA further found that the firm's written policies and procedures did not require its registered representatives to weigh the economic consequences of purchasing different share classes or to explain those consequences to customers. Moreover, Banorte Securities failed to provide guidelines that instructed registered representatives that Class A share off-shore mutual fund purchases eligible for these low front-end loads were generally cheaper for customers than Class B shares.
During 2003 through May 2004, most mutual fund sales at Banorte Securities were in Class B shares, despite the fact that the low front-end loads available to the firm's customers meant that an investment in Class A shares generally yielded a higher return than a similar investment in the Class B shares.
The firm settled this matter without admitting or denying the allegations, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2007, members of the public used this service to conduct 6.7 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business-from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms.
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