FINRA Orders $3 Million in Sanctions Against Securities America Over Mutual Fund Oversight Failures

Key Takeaways

• FINRA Sanctions: Securities America agreed to a censure, a $1 million fine, and $2,019,040 in restitution over failed mutual fund supervision.
• Inadequate Oversight: From 2018 to 2024, the firm lacked systems to properly supervise Class A mutual fund switches and short-term sales.
• Investor Costs: More than 3,000 transactions collectively cost customers over $2 million in commissions and fees.
• Reg BI Violations: After June 2020, oversight failures breached the Care and Compliance Obligations of Regulation Best Interest.
• Post-Acquisition Shift: Following its merger into Osaic Wealth, the new firm is handling customer restitution and new supervision controls.

Deep Dive

Securities America for years failed to properly supervise the sale and switching of Class A mutual funds, leading investors to pay more than $2 million in avoidable costs, according to the Financial Industry Regulatory Authority (FINRA). In a settlement finalized through a Letter of Acceptance, Waiver, and Consent, which the firm neither admitted nor denied, FINRA issued a censure, a $1 million fine, and $2,019,040 in restitution to impacted customers. Interest will also be added to each payment.

The findings trace back to January 2018, when Securities America was still operating as a major independent broker-dealer with more than 3,000 registered representatives and nearly 2,000 branch offices nationwide. FINRA said the firm relied heavily on Class A share revenue, accounting for more than a quarter of its brokerage business, but did not maintain supervisory systems capable of ensuring those products were being recommended appropriately.

Switching and Short-Term Sales Flagged as High-Risk

FINRA found that the firm failed to enforce rules designed to protect investors when representatives recommended that customers:

• Switch from one family of Class A mutual funds to another, often triggering new sales charges
• Sell Class A shares after short holding periods, despite the funds being designed for long-term investment

Class A mutual funds typically include upfront sales charges that take time to recoup, meaning customers could end up paying more than necessary when representatives treated them as short-term products.

FINRA said Securities America did not provide supervisors with meaningful guidance on how to assess whether a switch or sale was suitable or, after June 2020, in the customer’s best interest under Regulation Best Interest (Reg BI).

Even the documentation intended to support oversight fell short. Representatives were supposed to collect disclosure “switch letters” from customers, but around 45% of flagged switch transactions lacked one, and there was no system in place to check whether letters were actually collected.

Failed Alerts and Missed Red Flags

The regulator also pointed to a vendor error that caused the firm’s automated system to under-report potentially harmful switches for more than four years.
Instead of flagging transactions within a 90-day window, it only generated alerts when both trades occurred on the same day, resulting in thousands of missed alerts until FINRA examiners identified the flaw in 2022.

Short-term trades that were flagged faced another problem. According to the settlement, analysts reviewing those alerts lacked criteria or oversight, and many transactions were excluded from review entirely based on factors irrelevant to investor protection.

The cumulative impact: more than 1,000 questionable mutual fund switches and more than 2,000 short-term sales that collectively cost investors $2,019,040 in commissions and fees.

Securities America was acquired by Osaic Wealth on June 14, 2024, and subsequently withdrew its FINRA registration. Osaic has since implemented its own supervisory system for the inherited accounts.

The settlement also requires Securities America to provide FINRA with proof of all restitution payments within 120 days of the agreement’s acceptance. Any unclaimed funds must be handled in accordance with state unclaimed-property rules.

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