Finra Fines Cambridge Investment for UIT/Mutual Fund Sales Violations
Continuing its pressure on firms to improve supervision of mutual fund and unit investment trust sales and fee abuses, the Financial Industry Regulatory Authority censured independent broker-dealer Cambridge Investment Research on Tuesday and fined it $150,000.
Cambridge also failed to follow up on system alerts about potential unsuitable short-term trading in A-shares of mutual funds and in UITs—both of which are designed for long-term holding periods—and to identify excess commissions charged on 30 transactions in 2013 and 2014, the letter said. Because Cambridge delayed fixing alerts earlier identified by Finra, customers were overcharged about $17,100 in 31 trades—and one trade was erroneously recorded with a $25,000 commission—according to the letter.
Cambridge accepted the sanctions without admitting or denying Finra’s findings, as is typical of the industry-financed regulator’s consent orders. In April 2015, Cambridge agreed to a $250,000 fine from Finra for failing to apply discounts for UIT rollover trades to customers.
A spokesman for the Iowa-based broker-dealer, which has 3,366 advisors, according to its website, confirmed it reached the settlement without admitting or denying the facts.
The relatively small size of most of the alleged violations in the Cambridge order indicate regulators’ increasing impatience with firms that fail to maintain and enforce supervisory procedures to curb unsuitable trading and excessive fees. Finra earlier this week imposed $4.7 million of sanctions against Oppenheimer & Co. for failing to inhibit brokers who recommended short-term trading of UITs.
The issue of enforcing supervision is of particular concern at independent broker-dealers, most of which contract with large affiliated brokers to oversee compliance for smaller offices. Cambridge’s surveillance system generated 11,910 alerts about short-term trading in UITs and mutual fund Class A shares over 18 months in 2013 and 2014, but its “principals did not reject a single transaction,” the consent letter said.
It excoriated the firm for failing to guide its principals on how to respond to the alerts by calling customers to ask about the reasons for the trades and to ensure they understood such consequences as fees and taxes, according to the letter.
While Cambridge’s surveillance system was programmed to identify so-called switch or exchange trades, a common UIT abuse where the proceeds of trades are used to buy almost identical instruments, it did not issue alerts on other potentially unsuitable short-term trade recommendations, the letter also said. And the firm’s pattern reports aimed at identifying brokers prone to short-term trading also focused solely on switches.
Cambridge also failed to press brokerage offices with supervisory responsibilities, known as offices of supervisory jurisdiction, to follow procedures requiring them to send and receive consent letters from customers acknowledging switch transactions, the letter said.
Cambridge after December 2014 “enhanced” its electronic trade surveillance system and supervisory procedures to address short-term trading of A shares and UITs, and hired additional technology staff, the letter said. The firm also reimbursed its customers’ excess commissions after Finra identified them in 2014 and adjusted its breakpoint alert system in 2017, according to the letter.