Mutual Fund Sales Violations

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“must recommend a mutual fund share class that is most suitable for customers”

According to the Financial Industry Regulatory Authority (FINRA), sales practice rule violations from the sale of mutual funds has been a frequent source of FINRA arbitration claims. Financial advisors are required to recommend a mutual fund share class that is most suitable for a customer, not the share class which provides the greatest commission that is the result of conflicts of interest. Mutual funds can be purchased with a sales commission (load funds), with no sales commission (no-load), or a deferred sales commission (back-end load) with a contingent sales commission based on how long the mutual fund shares are held. Additionally, there are different operating expenses and management fees which complicate the decision-making process. For most investors, these differences are difficult to understand which requires FINRA sales practice rules for mutual funds to protect the investing public.

Mutual funds are designed to be long term investments which are to be held for a client’s entire investment time horizon. In some instances, a transaction between different mutual funds or different mutual fund families is considered suitable if it is a part of a bone fide asset allocation investment program. The recommendation of a mutual fund sale and purchase of another mutual fund can result in unintended taxes in a taxable investment account.

Mutual fund switching among mutual funds with similar investment objectives is considered a FINRA sales practice violation if it has no legitimate investment purpose and may needlessly impose a sales commission charge and increased tax liability on the customer. Mutual sales breakpoint violations occur when brokerage firms fail to supervise its financial advisors who recommend mutual fund purchases in amounts just below the sales commission breakpoint where the customer could pay a lower sales commission charge. The incentive to the brokerage firm and its financial advisor is a bigger payday and at the expense of client funds.

FINRA sales practice rules and regulations concerning mutual funds include:

KlaymanToskes can help you determine whether an investment loss is the result of a brokerage firm and its financial advisor’s violation of FINRA sales practice rules for mutual funds in your brokerage investment account. If an investor suffers losses as a result of mutual fund sales practice violations they may be able recover their losses in a FINRA arbitration claim for damages.

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