Cambridge Investment Research Agrees to FINRA Sanctions to Resolve Supervisory System ViolationsTuesday, January 21, 2020
On December 31, 2019, the Financial Industry Regulatory Authority (FINRA) Department of Enforcement imposed sanctions against Cambridge Investment Research, Inc. (Cambridge), a registered broker-dealer headquartered in Fairfield, Iowa that operates on an independent contractor model, in a Letter of Acceptance, Waiver and Consent (AWC) to resolve violations of FINRA rules and regulations. Cambridge has 2,400 branch offices throughout the U.S. with approximately 4,200 registered representatives.
According to the AWC, Cambridge failed to establish and maintain a supervisory system reasonably designed to supervise short-term trading of UITs and mutual fund Class A Shares between July 1, 2013 and December 31, 2014. Although Cambridge’s supervisory system included an automated trade surveillance system to identify potentially unsuitable short-term trading or switch transactions on long-term products such as Class A Shares and UITs, the firm did not provide sufficient guidance for the principals that were supposed to follow-up on trades flagged as potentially unsuitable. Thus, the firm’s principals were inconsistent in following up on the alerts and failed to contact certain customers to ensure they understood the consequences for these trades. Although the firm required supervisors to collect signed letters from customers acknowledging all switch transactions that triggered the alert system, Cambridge failed to identify that many supervisors were not obtaining these letters from customers.
The firm also failed to supervise compliance with NASD Rule 2440 and FINRA Rule 2121 between February 1, 2014 and September 21, 2014, which resulted in customers being charged excess commissions totaling $17,124 on 31 transactions and one additional trade in which the commission amount of $25,000 was entered in error. The firm’s supervisory system required supervisors to monitor instances of potential excessive commissions charged to customers in its automated trade surveillance system when the trade generated other alerts aside from the alert for excess commissions.
Finally, Cambridge failed to ensure customers received available mutual fund breakpoint discounts between February 1, 2016 and January 31, 2017. Customers are able to procure a breakpoint discount through a single purchase large enough to reach a breakpoint, through multiple purchases in either a single mutual fund or mutual fund family, and many other ways including “rights of accumulation” and “letters of intent.” Though its electronic trade surveillance system alerted supervisors on potential mutual fund transactions where customers did not receive the benefit of available breakpoints, Cambridge could not demonstrate that its principals consistently reviewed these transactions associated with this alert unless the transaction generated other alerts that required supervisory reviews. According to the AWC, of the 1,040 alerts that were triggered and not reviewed by a supervisor between May 20, 2015 and May 19, 2017, Cambridge identified 274 transactions that resulted in $27,849 in overcharges to customers.
Based on the foregoing, Cambridge violated NASD Rule 3010 and FINRA Rules 3110 and 2010. By signing the AWC, Cambridge consented to a censure and $150,000 fine. Additionally, after December 31, 2014, the firm enhanced its electronic trade surveillance system and WSPs to specifically address short-term trading of mutual Class A shares and UITs. They also hired staff familiar with the surveillance system to ensure proper maintenance and data integrity of the surveillance system. Finally, Cambridge adjusted its breakpoint alert on May 19, 2017 to require mandatory principal review of mutual fund transactions in which the customers may not have received available breakpoint.
If you lost money due to broker misconduct, you may be able to recover. Since 1998 we have been helping victims of investment fraud and broker misconduct. Call us today (1-877-410-8172) for a free consultation.