WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has ordered Barclays Capital, Inc. to pay more than $10 million in restitution, including interest, to affected customers for mutual fund-related suitability violations. These suitability violations relate to an array of mutual fund transactions including mutual fund switches. Additionally, the firm failed to provide applicable breakpoint discounts to certain customers. Barclays was also censured and fined $3.75 million.
NASD Notices to Members 94-16 and 95-80 remind broker-dealers of their obligation to ensure that any recommendation to switch mutual funds be evaluated with regard to the net investment advantage to the investor. FINRA noted that “switching among certain fund types may be difficult to justify if the financial gain or investment objective to be achieved by the switch is undermined by the transaction fees associated with the switch.” A “mutual fund switch” involves one or more mutual fund redemption transactions coupled with one or more related mutual fund purchase transactions.
FINRA found that from January 2010 through June 2015, Barclays’ supervisory systems were not sufficient to prevent unsuitable switching or to meet certain of the firm’s obligations regarding the sale of mutual funds to retail brokerage customers. In particular, the firm incorrectly defined a mutual fund switch in its supervisory procedures to require three separate transactions within a certain time frame. Based on this incorrect definition, Barclays failed to act on thousands of automated alerts for potentially unsuitable transactions, excluded transactions from review for suitability and failed to ensure that disclosure letters were sent to customers regarding the transaction costs. As a result, during the five-year period, there were more than 6,100 unsuitable mutual fund switches resulting in customer harm of approximately $8.63 million.
Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement said, “The proper supervision of mutual fund switching and breakpoint discounts is essential to the protection of retail mutual fund investors, and this case highlights FINRA’s commitment to ensuring that firms meet these obligations.”
Additionally, FINRA found that the firm failed to provide adequate guidance to supervisors to ensure that mutual fund transactions for its retail brokerage customers were suitable based upon customer investment objectives, risk tolerance and account holdings. During a six-month look back review, 1,723, or 39 percent of mutual fund transactions were found to be unsuitable, with 343 customers experiencing financial harm totaling more than $800,000, including realized losses.
In addition, during the same five-year period, Barclays’ supervisory system failed to ensure that purchases were properly aggregated so that eligible customers could be provided with breakpoint discounts. A six-month look back review found that the firm failed to provide eligible customers discounts in 98 Class A share mutual fund transactions.
In concluding this settlement, Barclays neither admitted nor denied the charges, 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 2014, members of the public used this service to conduct 18.9 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA’s Disciplinary Actions Online database. Investors can also call FINRA's Securities Helpline for Seniors at (844) 57-HELPS for assistance or to raise concerns about issues they have with their brokerage accounts and investments.
FINRA, the Financial Industry Regulatory Authority, is the largest independent 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 rules, enforcing those 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 firms. For more information, please visit www.finra.org.