FINRA Censures and fines Kovack Securities in connection with Short-term Mutual Fund Trading
According to a Letter of Acceptance Waiver and Consent this week, the Financial Industry Regulatory Authority (FINRA) censured and fined Kovack Securities (CRD # 44848) $210,000 for supervisory failures.
From March 2015 to May 2017, the firm reportedly failed to establish, maintain, and enforce a supervisory system, including written procedures, reasonably designed to achieve compliance with FINRA’s suitability rule as it pertains to short-term trading of mutual fund class A shares, which are designed to be long-term investments.
Specifically, Kovack purportedly did not allocate reasonable resources to reviewing such trades, did not establish a process reasonably designed to detect short term trading of class A share mutual funds, and did not reasonably respond to red flags of unsuitable mutual fund trading by one of its former representatives.
Class A mutual fund shares typically include upfront sales charges, known as “front-end loads.” They generally are suitable only as long-term investments and not short-term trading vehicles because an investor usually must hold the A share for several years to account for the front-end load.
Mutual fund “switching” occurs when a customer sells mutual fund shares and reinvests the proceeds in another mutual fund, often incurring additional charges and commissions. Frequent short-term purchases and sales of A shares in a customer’s account may be unsuitable because of the frequency of the transactions, the transaction costs incurred, or the customer’s financial situation, investment objectives and needs
From March 2015 to May 2017, a Kovack representative allegedly engaged in a pattern of short-term trading of A share mutual funds in eleven accounts of eight customers, including five seniors, according to the findings.
The Kovack rep reportedly bought and sold A share mutual funds in those accounts, using the proceeds from the sales to purchase one or more equities, and then selling the equities after a few months to repurchase A share mutual funds. In total, the representative allegedly recommended over $2.1 million in A share mutual fund purchases to the eight Kovack customers after previously recommending sales to the same customers in the prior year. This activity caused the customers to incur unnecessary sales charges. During the investigation, the firm voluntarily made restitution to the affected customers.
Potential Lawsuits to Recover Financial Losses
The foregoing information is all publicly available and provided by the White Law Group. If you are concerned about investments with Kovack Securities, the securities attorneys at The White Law Group may be able to help you. For a free consultation with a securities attorney, please call (888) 637-5510.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Seattle, Washington. For more information, please visit our website, www.whitesecuritieslaw.com.
To learn more about the investigation, please see: Kovack Securities – Broker Misconduct, Customer Complaints and Regulatory Actions.
Tags: Kovack Securities fined, Kovack Securities FINRA, Kovack Securities investigation, Kovack Securities lawsuit, Kovack Securities mutual fund trades, Kovack Securities short term trading Last modified: March 24, 2023