FINRA recently fined a broker-dealer $3 million and ordered $2 million in restitution after finding failures in the firm’s supervision of mutual fund switching and short-term sales practices. According to regulators, the misconduct resulted in clients paying unnecessary fees that may not have been in their best interest.

Between January 2018 and June 2024, registered representatives at the firm executed approximately $3.8 billion in Class A mutual fund share purchases, which represented a significant portion of the firm’s overall revenue. FINRA determined that the firm failed to implement supervisory systems and written procedures reasonably designed to monitor these recommendations in accordance with suitability rules and Regulation Best Interest’s Care Obligation.

Why Switching Raises Red Flags

FINRA reiterated that switching a client from one mutual fund family to another can trigger new front-end sales charges on Class A shares. When this occurs shortly after a prior purchase, customers may pay additional fees without holding the investment long enough to benefit from it. Regulators emphasized that such practices create heightened risk of recommendations being driven by commissions rather than the client’s financial interests.

Supervisory Breakdowns Identified

According to FINRA, the firm’s supervisory system was not reasonably designed to detect:

  • Mutual fund switching activity
  • Short-term sales of Class A shares

Even when some of these trades were flagged internally, the firm failed to adequately review whether representatives had properly considered fees, commissions, and client best interest factors. As a result, FINRA found failures involving more than 1,000 fund switches and over 2,000 short-term sales that may have been unsuitable or inconsistent with Reg BI obligations.

Enforcement Outcome

Without admitting or denying the findings, the firm agreed to:

  • Pay $1 million in fines
  • Provide $2 million in restitution to affected clients

FINRA stated that the violations reflected systemic supervisory weaknesses rather than isolated misconduct.

What This Means for Compliance Teams

This enforcement action reinforces the importance of having active, not just written, supervisory systems in place for sales practice risks. Compliance teams should take this as a prompt to:

  • Review mutual fund and annuity switching surveillance to ensure it detects both patterns and short-term trading activity.
  • Re-evaluate Reg BI supervision to confirm that fee impact, alternatives, and client best interest factors are being consistently documented.
  • Test escalation and review workflows when potentially problematic trades are flagged to ensure issues are not only identified but meaningfully reviewed.

Ultimately, this case highlights that firm revenue concentration alone can elevate regulatory risk, making proactive supervision and continuous training essential to protecting both clients and the firm.