Articles Posted in Mutual Funds

The Financial Industry Regulatory Authority says that Oppenheimer & Co. (OPY) must pay $3.4M in sanctions. According to the regulator, for eight years the firm was about four years late when submitting 365 filings about disciplinary actions that it brought against its brokers and in arbitration and litigation settlements. FINRA is also accusing Oppenheimer of not giving seven claimants the documentation they needed in their arbitration against Mark Hotton, an ex-registered representative, and of overcharging 825 customers more than $1M collectively for mutual fund shares over a six-year period.

The self-regulatory organization claims that the late filings to FINRA took place between 2008 and 2016 and that Oppenheimer failed to provide claimants the documentation related to the Mark Hotton allegations between 2010 and 2013. The failure to apply the appropriate fee waiver discount for mutual fund shares purportedly occurred between 2009 and 2015.

Already, Oppenheimer has paid over $6M to settle customer disputes alleging inadequate supervision of Hotton and another $1.25M to 22 customers who did not file arbitration cases but suffered losses, too. Oppenheimer also was ordered to pay a $2.5M fine to FINRA last year over the Hotton claims. The former broker, whom FINRA permanently barred from the securities industry three years ago, was sentenced sentenced to 11 years in prison for stealing client monies and excessively trading their brokerage accounts.

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The U.S. Securities and Exchange Commission has barred John Leo Valentine from working in the financial services industry, but he can re-apply after two years. The adviser is the founder and president of Valentine Capital Asset Management.
According to the regulator, Valentine did not disclose to clients that he had certain conflicts of interest related to a commodities fund in which they invested.  The SEC contends that from ’07 to late ’11, Valentine recommended that clients, who were mostly retirees, purchase shares of Bridgeton Global Directional Fund, which invested in commodity futures contracts. After Valentine could no longer make commissions from the managed futures fund, he purportedly advised the investors to put their money in Valt, which was a commodities fund he created that allowed him to earn compensation.
However, said the SEC, Valentine did not tell clients that he had a financial incentive to recommend Valt instead of Bridgeton. After just a few months in operation, Valt’s clearing broker and custodian filed for bankruptcy related to a fraud involving the broker’s CEO, and Valt stopped almost all trading activity. In addition to the industry bar, Valentine must pay $140K in penalties.

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The U.S. Securities and Exchange Commission has put out an emergency asset freeze against Peter Kohli, a former broker. According to the regulator, the Pennsylvania resident bilked at least 120 investors when he fraudulently raised over $3.2M from them between 2012 and 2015. The regulator attributes the funds collapse to the ex-broker’s “extreme recklessness.”

At the time, Kohli was CEO and president of DMS Advisors, a dually-registered investment adviser and brokerage firm. He began the DMS Funds series, comprised of four emerging market mutual funds, in 2012. The SEC claims that he overstated the funds’  level of sophistication while disregarding the risk that he and DMS Advisors might not be able to cover certain expenses.

The Commission claims  that Kohli stole money from investors as the funds became beleaguered and he committed three other frauds to keep his scam going.  He also purportedly misappropriated money he solicited to invest in one of the funds and his accused of drawing in two kinds of investments in Marshad Capital Group, which was DMS advisors’ holding company.

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The Financial Industry Regulatory Authority said that a UBS Group AG (UBS) unit will pay $250K to resolve charges accusing it of not waiving certain fees for mutual fund customers that were eligible for the reduction. FINRA said that the broker-dealer overcharged customers $277,636 to invest in mutual funds. The failure to wave these fees purportedly took place from 9/09 to 6/13.

The self-regulatory organization cited alleged supervisory failures. According to the settlement notice, UBS depended largely on its registered representatives to identify when sales charge waivers were warranted and identifying them. These waivers were linked to the reinstatement rights that let investors get around having to pay front-end sales charges.

Under these rights, individual investors are generally allowed to reinvest money made from selling class A mutual fund shares in the same fund family or the same fund without having to pay fees at the front end. They are given 90-120 days to reinvest for the waiver to be applicable.

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The Financial Industry Regulatory Authority has announced that PNC Investments will pay nearly $225K in restitution for charging retirement clients too much for mutual fund investments. According to the regulator, the brokerage firm did not apply waivers for investors in certain Class A share mutual funds even though there was a waiver for front-end charges for eligible customers.

Instead, said FINRA, PNC Investments sold Class A shares customers with a front-end load or other shares that had a back-end load and higher fees and expenses, some of which were charged on an ongoing basis. Because of this, certain customers were charged excessive fees and paid them.

FINRA said that PNC Investments charged 121 customer accounts in excess of $191,740 for mutual funds—although the actual amount, with interest, was closer to $224,750. PNC will pay restitution to eligible investors.

The brokerage firm self-reported the overcharges after reviewing its own conduct last year to assess whether it was issuing the sales waiver to those that were eligible. FINRA said that the broker-dealer experienced lapses in supervision, did not keep up written policies and procedures that were adequate, and failed to help advisers assess when to waive the sales charges.

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FINRA Accuses Ex-Broker of Unsuitable Trading Involving Mutual Funds
David Randall Lockey, a former broker, is facing Financial Industry Regulatory Authority charges for allegedly engaging in improper trading of customer accounts while associated with SWS Financial Services Inc. He is no longer with that firm, now called the Hilltop Securities Independent Network. According to the regulator, Lockey took part in “unsuitable short-term trading and switching” involving unit investment trusts and mutual funds in four accounts between ’12 and ’14.

Lockey purportedly made about $75,730 for himself and the firm while engaging in improper trading. Meantime, three of the four customers whose accounts he used sustained losses of $15,699. The fourth customer made a gain of almost $5,000.

FINRA said Lockey has not been registered with any broker-dealer since 2014.

Ex-TV Commentator Settles Penny Stock Fraud Charges with the SEC
The U.S. Securities and Exchange Commission is charging former FOX commentator Tobin Smith with fraud. According to the regulator, Smith, who is also a market analyst, and his NBT Group fraudulently promoted a penny stock to investors.

The SEC said that both Smith and his firm received payments to prepare and distribute e-mails, articles, blogs, and other communication promoting IceWEB Inc. stock. They purportedly failed to fully disclose they were receiving the compensation.

The investors were not made aware of that part of what Smith and NBT were paid was linked to a sustained rise in the data storage company’s share price. The Commission said that marketing materials the investors received included misleading and false statements put there to artificially up the share price and trading volume of IceWEB stock. For example, payment for promotional efforts was $300K and IceWEB stock. NBT could also make over $250K if marketing campaigns proved successful.

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The Securities and Exchange Commission’s Division of Investment Management has put out a guidance on its website cautioning mutual fund directors to more closely scrutinize the money that is paid to brokers and certain other intermediaries. The warning comes following a sweep exam, which found that fees that should be going toward record-keeping and other administrative services are instead being directed toward encouraging fund sales. A number of mutual funds, brokerage firms, investment advisers, and transfer agents were examined prior to the issuance of this guidance.

SEC rules stipulate that sub-accounting fees cannot go toward finance distribution. These fees should only go toward record-keeping and shareholder services. However, there is an issue with mutual fund-maintained omnibus accounts in which all the fees can be placed together. In such instances, payments made to brokers for selling certain funds may get buried in these administrative fees.

Now, the Commission wants fund directors to watch out for fees that intermediaries selling the funds are getting for account services. It wants these directors to establish processes to assess whether a sub-accounting fee is being harnessed to increase sales. It also is calling on fund service providers and advisers to explain distribution and servicing specifics to fund directors.
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Whitebox Advisors says it intends to liquidate its mutual funds next month following a slew of redemptions and losses this year. A spokesperson for the investment firm said that with so many people asking for their money back, the concentration risks to investors had become too high.
The three mutual funds that are closing are:

· Whitebox Tactical Opportunities Fund, which oversees $112.8M
· Whitebox Market Neutral Equity Fund, which oversees $40.25M
· Whitebox Tactical Advantage Fund, which oversees 20.3M
The news comes just weeks after Third Avenue Management shook up the equity and credit markets when it announced that it was liquidating its Focused Credit Fund (TFCVX), which is a $788.5M corporate debt mutual fund, but that distributions to investors would be delayed so as to prevent even bigger losses. Stone Lion Capital Partners has also suspended redemptions in its $400M of credit hedge funds following many redemption requests.
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Barclays Capital Gets FINRA Fine for Unsuitable Mutual Fund Transactions

The Financial Industry Regulatory Authority said that Barclays Capital, Inc. (BARC) must pay over $10M in restitution plus interest to customers that were impacted by violations related to unsuitable mutual fund transactions. The self-regulatory organization said that the firm did not give certain customers the breakpoint discounts that applied. Aside from the restitution, Barclays must pay a $3.75M fine.

According to the SRO, from 1/10 through 6/15, the firm’s supervisory systems were not adequate enough to make sure that unsuitable transactions didn’t happen or that the firm’s duties related to mutual fund sales to retail brokerage clients were met. FINRA said that Barclays supervisory procedures wrongly defined a mutual fund switch as warranting three transactions within a specific period of frame. Because of this erroneous definition, the firm did not act on thousands of automated alerts warning of transactions that might be unsuitable, failed to include certain transactions for suitability review, and neglected to make sure that customesr got disclosure letters about transaction costs. Over 6,100 unsuitable mutual fund switches occurred, causing r about $8.63M in customer harm.

FINRA said that the Barclays did not give its supervisors enough guidance so that they could make sure that brokerage customers were engaging in mutual fund transactions that were suitable for their investment goals, holdings, and ability to tolerate risks. The SRO, which evaluated activities over a six-month period of time, said that 39% of mutual fund transactions were found unsuitable and customers suffered financial harm, including realized losses, of over $800K.

Also, during these five years, the firm’s supervisory system did not succeed in making sure that purchases were properly aggregated so eligible customers could get breakpoint discounts, including those involved in 100 Class A share mutual fund transactions.

By settling, Barclays is not denying or admitting to FINRA’s charges. It is, however, consenting to the entry of findings.
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The Securities and Exchange Commission is looking into whether Franklin Templeton, Oppenheimer Funds (OPY), J.P. Morgan Chase & Co. (JPM), and other mutual fund managers are charging investors for fund fees that have not been fully disclosed. While money managers are allowed to use some of investors’ money to pay compensation to the brokers who sell a fund’s shares, as well as for certain marketing purposes, the regulator wants to know whether firms are exceeding the allowed limits.

The Commission is trying to find out whether mutual fund companies have come up with ways to make extra payments to brokers by using investor assets to cover certain services, such as the consolidation of client trading records. The agency is worried that proper disclosure of these added fees are not being made to investors. The SEC is also wondering if brokers are more inclined to recommend funds that provide such additional payments, compelling them to prioritize profit over funds.

Fund companies have said that they do properly disclose fees for marketing. Oppenheimer, which is one of the companies that the SEC has investigated over this issue, has said that it doesn’t bill mutual fund clients for recordkeeping costs but that the money comes from the firm.
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