Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Essex Securities, LLC (Essex Securities) alleging that from February 2010, through March 2011, Essex Securities through one of its brokers violated industry rules by engaging in a pattern of unsuitable mutual fund switching, a form of churning, in the accounts of seven customers. Further, FINRA found that Essex Securities violated FINRA’ supervisory rules by failing to establish and maintain a supervisory system reasonably designed to prevent unsuitable mutual fund switching.
Essex has been a FINRA member broker-dealer since 1998, is headquartered in Topsfield, MA, and conducts a general securities business with approximately 50 brokers out of 26 branch offices.
FINRA alleged that an Essex Securities broker engaged in a pattern of unsuitable mutual fund switching in seven customer accounts by not having reasonable grounds for believing that such transactions were suitable for those customers due to the frequency of the transactions and the transaction costs incurred. Part of the suitability rule requires brokers to take into consideration the cost consequences of the transactions and ensure that there is a reasonable basis for the incurring of such costs. In this case, FINRA found that on at least 29 occasions, the broker recommended that customers sell mutual funds within only one to thirteen months after purchasing them. Essex Securities was found to have earned commissions of approximately $60,000 on these switch transactions and broker himself was paid approximately $54,000.