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Principal Fails to Police Unsuitable Mutual Fund Switches
by Howard Haykin
Gary Weiss agreed to pay a $5K fine and to not serve in a principal capacity for 30 days to settle FINRA charges that he failed to reasonably supervise the activities of a registered rep who recommended unsuitable mutual fund transactions.
FINRA FINDINGS. Weiss, who holds the Series 4 (Options) and Series 24 (General Securities) Principal licenses, was associated with Salomon Whitney Financial (“SWF”) from December 2011 through December 2015. While there, Weiss served in several capacities, including as a General Securities Rep and a General Securities Principal. He also functioned as the firm’s COO and CCO.
In April 2015, a customer opened an IRA account with one of the registered reps under Weiss’ supervision. The customer sought "Preservation of Capital" with a Short-Term (1-3 years) Investment Time Horizon. One month later, the customer transferred mutual funds he held at another firm to his new IRA account at SWF. All of the mutual funds were Class A shares from the same fund family.
Yet, 3 days later, based on the broker’s recommendations, the customer sold those mutual funds and used the $865,000 in proceeds to purchase Class A shares of 14 different mutual funds from 12 different fund families (collectively, the "New Mutual Funds”).
What’s Wrong with This Picture? The broker's recommendation to switch to the New Mutual Funds was unsuitable because:
- Investment objectives of the New Mutual Funds were not consistent with the customer’s investment objective of Capital Preservation. Rather, they were described as "capital appreciation," "capital growth," or "total return."
- The purchase of Class A shares, which are generally appropriate for investors with long-term investment horizons, were not consistent with the customer’s shorter investment horizon; and,
- By purchasing mutual funds from 12 different mutual fund families, the customer lost any opportunity to receive breakpoint discounts.
As the supervising principal, Weiss failed to consider any of these contradictions during his supposed review of transactions. Weiss further failed to ensure that mutual fund switch letters sent by the broker to the customer included critical information – like the amount of the sales charges for the New Mutual Funds. Finally, Weiss came across as lacking a basic understanding of mutual funds. For instance, he didn’t know what breakpoint discounts were, and he didn’t know how front-end sales charges impacted the suitability review of mutual fund transactions.
Weiss was U5’d by SWF in December 2015 and, since that time, has not been associated in a registered capacity with any FINRA member firm.
This case addressed in this article was reported in FINRA Disciplinary Actions for February 2018.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2015043645101.