Capital gains distributions are the bane of mutual fund investors.  So it made sense when a Registered Rep from St. Paul, MN, devised a strategy by which customers invested in the firm's proprietary Asset Strategy Mutual Fund would avoid the capital-gains distribution and instead realize a tax loss on their mutual fund holdings for the year.  The plan just didn't work out as intended.

    "Good intentions, but poor planning and execution."   RR McCullough accepted a $5K fine and 45-day suspension to settle FINRA charges relating to his failed strategy.  Here's how it went down:

On the RR's recommendation, customers liquidated their holdings in the Asset Strategy Fund before the fund made a distribution.  Customers held the liquidation proceeds in cash for a brief period before reinvesting those funds in other firm mutual funds.  The RR believed that it was necessary to structure the transaction this way to achieve the desired tax benefit.

FINRA found, however, that the customers collectively paid $27,239 in sales charges on their new mutual-fund purchases.  These sales charges largely - but not entirely - negated the tax benefit to each customers of avoiding capital-gains liability.  Meanwhile, the RR received nearly $14K in commissions.

    Tweaking the Strategy to Make it Work.   FINRA determined  that had the customers simply exchanged their Asset Strategy Fund shares for shares of other funds within the same family of funds, they would not have incurred any sales charges, and their net gain would have been substantially larger.  Moreover, FINRA found that at the time of the transactions at issue, McCullough was unaware that the affected customers could have achieved the desired tax savings through a mutual fund exchange, while also avoiding any sales charges. 

    Need to Do Appropriate Advance Research.   The information was readily available, but RR McCullough neglected to review relevant IRS publications or to consult with anyone else at his firm about more cost-effective ways of achieving the desired tax benefits.  The RR also provided misleading information to his firm in a Purchase Account Service Request that he prepared in connection with each of the customers’ mutual-fund repurchases - he answered “no” on each customer’s form as to whether the proceeds from the sale of another security were being used to open the account despite the fact that each customer’s purchase occurred within a matter of days of the customer’s liquidation, and in amounts either equal or nearly equal to the liquidation amounts. 

This is FINRA Case #2009017951701.   [March Disciplinary Actions]