FINRA Fines Emerson Equity over Predatory Mutual Fund Switching.

Chicago-based Stoltmann Law Offices is investigating financial advisors who switch clients into more expensive mutual funds that trigger unnecessary fees. Brokers often like to switch clients’ assets from one mutual fund class into another. Although they pitch these “trades” as more profitable for investors, they are making more money in fees and commissions.

FINRA, the federal securities industry regulator, has settled charges with two broker-dealers “for years of poor supervision of short-term mutual fund trades.” According to Investment News, on Dec. 22, FINRA “penalized Emerson Equity $1.7 million. A week later, FINRA hit an Advisor Group broker-dealer, Triad Advisors, with $705,000 in penalties, also for poor supervision of sales of the LJM Preservation & Growth Fund, an alternative mutual fund that closed in 2018.”

Emerson ran into problems from 2015 to 2020, Investment News notes, “when the firm and its CEO and founder, Dominic Baldini, failed to put into place a variety of systems to monitor short-terms trades of mutual fund Class A and Class B shares. Such systems would have enabled the firm to comply with FINRA’s suitability rule.”

Often a source of investor confusion, mutual fund share classes charge different prices to clients. For example, fund “A” shares charge an upfront commission while “B” shares charge higher exit fees, also known as “back-end loads.” Even so, investors get nipped one way or another when brokers shift client money between share classes. Investors can easily avoid these unnecessary fees by investing directly in “no-load” (commission-free) funds.

Emerson “failed to reasonably supervise the trades of one unnamed registered rep,” according to FINRA, and “over five years clients incurred more than $1.6 million in unnecessary charges. Emerson and Baldini agreed to FINRA’s findings without admitting or denying them. The firm was fined $60,000 and will pay more than $1.6 million in restitution to clients. Baldini was fined $5,000 and was suspended for 20 days from the industry as a principal.” This mutual fund-switching is a fraudulent practice and designed to do one thing – enrich the broker and firm through excessive commissions.

Disclosure is essential: Broker-advisors don’t always tell clients that certain trades will generate a windfall in commissions and fees for themselves and their firms. Who’s accountable if a broker-advisor gouges you on onerous and unnecessary fees, which erode your total returns? Brokerage firms are liable for the conduct of their agents – i.e., the financial advisor or broker.  Firms can also be liable for “failure to supervise” their financial advisors or brokers. Abusive practiced like trading in and out of mutual funds are likely “unsuitable” for a client, and the firm can be held liable for any losses incurred.

If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!