Two Firms to Pay Over $5 Million for Unsuitable Fund Recommendations
Two large broker-dealers have agreed to pay over $5 Million in fines and restitution for making unsuitable sales of floating-rate bank loan funds. FINRA charges that the firms sold the sometimes volatile products to customers seeking to preserve principal. FINRA says that the firms sold the fund products to obtain “yield in a low-interest-rate environment.” FINRA alleges the firms failed to supervise and train the sales force.
OUR TAKE: This action shows the importance of previous regulatory statements. In its annual regulatory and examinations priority letter issued in January, FINRA said it would focus on sales practices for yield-chasing products including leveraged loan products, expressing concern that reps may not understand and adequately explain market, credit, and liquidity risk when recommending yield-chasing products in this low-yield environment, (See http://blog.cipperman.com/2013/01/14/finra-focusing-on-sales-of-products-promising-higher-yield.aspx) Generally, when a regulator gets this specific, enforcement actions will follow.