On December 29, 2015, Barclays Capital, Inc. (“Barclays”) entered into a Letter of Acceptance, Waiver and Consent (the “AWC”) with FINRA to settle alleged mutual fund-related suitability violations and related supervisory failures, as well as alleged failures to provide applicable breakpoint discounts to certain customers.
FINRA alleged that, for a period of at least five years, Barclays had inadequate systems and written procedures for supervising the sale of mutual funds to retail brokerage customers. In particular, the AWC alleges that Barclays: (1) failed to provide adequate supervisory guidance for ensuring the suitability of mutual fund transactions; (2) incorrectly defined a mutual fund “switch;” (3) failed to identify unsuitable mutual fund transactions, including but not limited to switches; (4) failed to notify customers of the costs associated with switches; and (5) failed to have a centralized system in place to aggregate mutual fund purchases to ensure customers received available mutual fund breakpoint discounts. The AWC cites NASD Notices to Member 94-16 and 95-80 which remind broker-dealers of their obligation to ensure that any recommendation to switch mutual funds be evaluated with regard to the net investment advantage to the investor. FINRA noted that “[s]witching among certain fund types may be difficult to justify if the financial gain or investment objective to be achieved by the switch is undermined by the transaction fees associated with the switch.” FINRA alleged that from January 2010 through March 2015, Barclays’ written compliance policies and supervisory procedures for its retail brokerage business incorrectly defined a mutual fund switch to require three separate mutual fund transactions within a particular time frame and thus, were not sufficient to prevent unsuitable switching resulting in customer harm of approximately $8.63 million.
The AWC alleges that, as a result of its conduct, Barclays violated NASD Rules 2310(a) and 3010(a) and (b) and FINRA Rules 2010, 2111(a) and 3110(a) and (b). Barclays neither admitted nor denied the charges, but consented to the entry of FINRA’s findings and the imposition of sanctions, including, among other things, a censure, a fine of $3.75 million and restitution, including interest, of over $10 million.
The AWC is available at: http://www.finra.org/sites/default/files/Barclays_AWC_122915.pdf.