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Regulatory Sanctions

FINRA Suspends Brokers for Trading Class A Mutual Funds

August 14, 2017
FINRA recently reported disciplinary actions against 2 Registered Reps who recommended that customers trade in and out of front-end loaded mutual funds (Class A shares). All customers were retired and all were living on fixed incomes. Not a very sympathetic scenario for the brokers – as confirmed by the suspensions handed down by FINRA. Brokers have little or no wiggle room when negotiating settlements.


CASE ONE.    Stephen Landa ... agreed to pay over $23K in fines and restitution and to serve a 2-month suspension to settle FINRA charges that he employed an unsuitable short-term mutual fund trading strategy in the individual account of a customer and the joint account of that customer and another customer.


BACKGROUND.   Landa, a resident of Easton, CT, has spent 23 years in the securities industry with 6 firms. From 2005 until August 2015, he was with Invest Financial Corp., serving as a General Securities Rep, a General Securities Principal, and a Municipal Fund Securities Principal. He currently is not associated with a FINRA member firm. Landa has no relevant disciplinary history.


FINRA FINDINGS.    Between December 2013 and June 2015, Landa employed a short-term mutual fund trading strategy in the individual account of customer "SJ" and the joint account of customers "SJ" and "NJ". At the time, SJ and NJ were both 60 years of age or older, retired, and living on fixed incomes. Also, both SJ and NJ had conservative investment objectives and moderate risk tolerances. Nevertheless, on at least 12 occasions during the 1-1/2 year period, Landa recommended that SJ and NJ purchase mutual fund shares and then, shortly thereafter, recommended that they sell those shares.


Landa did not have a reasonable basis for believing that such transactions were suitable, according to FINRA, which went on to say: even though mutual funds are intended as longer-term investments, Landa recommended that SJ and NJ sell the mutual fund shares after an average holding period of less than 6 months. It also didn't help that all of these transactions involved Class A mutual fund shares that carry front-end sales loads. SJ and NJ suffered collective losses in excess of $18,000


CASE TWO.    James Trent ... agreed to a 6-month suspension to settle FINRA charges that he engaged in a pattern of recommending unsuitable short-term trading of Class A mutual fund shares to customers, resulting in the customers (all of whom were retired) incurring unnecessary sales charges. No monetary sanction was imposed In light of his financial status.


BACKGROUND.    Trent, a resident of Lexington, SC, has spent 20 years in the securities industry with 6 firms. He holds a series 7 license. From October 2012 until May 2014, he was with AXA Advisors. He was with another firm from May 2014 to February 2017. Trent currently is serving his 6-month suspension and is not associated with another firm.


FINRA FINDINGS.    From 2/6/13 through 1/9/14, while with AXA Advisors, Trent serviced the accounts of 4 retired AXA customers whose ages ranged from 64 to 85. Trent recommended all the transactions that were executed in the 4 customers' accounts at AXA, including short-term trading involving Class A front-end loaded mutual funds.


In 14 of the transactions, Trent solicited the purchase of Class A mutual fund shares and, within a year of each purchase (on average, 6 months), Trent recommended selling the positions. The short-term trading activity resulted in the customers incurring over $6,300 in sales charges – for which Trent received about $2,900 in commission.   


Based on the foregoing, both registered reps violated FINRA Suitability Rule 2111.


FINANCIALISH TAKE AWAY.    The sanctions against Trent – a 6-month suspension seems particularly harsh, particularly when one considers the relatively small amount over money involved. However, protection of elderly investors is today’s #1 priority – even if the alleged violations took place several years ago.


These cases were reported in FINRA Disciplinary Actions for July 2017.

For details on Stephen Landa’s case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016049485101.

For details on James Trent’s case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2014041539301.