FINRA Sanctions Cambridge For Failure To Supervise UITs

Lawyers Representing Investors

Cambridge Investment Research a securities broker dealer headquartered in Fairfield Iowa has been censured and fined $150,000.00 by Financial Industry Regulatory Authority (FINRA) based upon findings that (1) Cambridge failed to adequately supervise mutual fund and unit investment trust (UIT) trades (2) Cambridge neglected to create an adequate supervision system to identify and prevent its stockbrokers from charging customers excessive commissions and (3) Cambridge neglected to identify and process discounts for customers that were eligible to receive them. Letter of Acceptance Waiver and Consent No. 2017052543601 (Dec. 31, 2019).

According to the AWC, an automated trade surveillance system had been used by Cambridge in order to detect possible inappropriate and unsuitable switch transactions and short-term trading. The surveillance system was supposed to identify alerts in situations where problematic unit investment trust switches or mutual fund trades were executed, but this system of supervision was flawed because of there being inadequate guidance provided to supervisors regarding the appropriate action to take with alerts. FINRA stated that none of the transactions which created those alerts were rejected by the securities broker dealer. In fact, the AWC stated that at least one of Cambridge’s stockbrokers made unsuitable short-term trades of mutual funds because of Cambridge’s failed supervisory system.

The AWC stated that none of the other electronic systems used by Cambridge were set up to trigger alerts in cases of potentially unsuitable transactions not categorized as switches. This led to unsupervised and problematic short-term unit investment trust and mutual fund transactions. Also, FINRA stated that there were instances where supervisors neglected to follow up with stockbrokers who appeared on a pattern report used by the securities broker dealer for purposes of thwarting inappropriate transactions. Cambridge also neglected to adequately enforce procedures which were set up to notify customers about possible inappropriate transactions and charges. The securities broker dealer’s conduct was violative of FINRA Rules 2010 and 3110 as well as NASD Rule 3010.

FINRA also stated that the securities broker dealer neglected to adequately monitor trades for excessive commissions. The system used by the securities broker dealer was not compliant because of supervisors failing to review transactions unless there were additional red flags present. The AWC stated that customers were overcharged on thirty-one transactions. In one case, a $25,000.00 commission (later reversed) had been charged to a customer in error. The AWC stated that the securities broker dealer violated FINRA Rules 2010 and NASD Rule 3010 in this regard.

In addition, FINRA stated that from February 1, 2016 to January 31, 2017, there was no system of supervision established by Cambridge for purposes of ensuring that its customers obtained discounts on mutual fund purchases. The AWC stated that Cambridge failed to take into account, inter alia, breakpoint discount schedules and household accounts. FINRA indicated that Cambridge had a system in place to alert the company when discounts failed to be applied but the securities broker dealer could not show that supervisors routinely reviewed and followed up on the alerts. FINRA determined that from May 20, 2016 to May 19, 2017, there were two hundred seventy-four transactions in which excessive charges were applied. FINRA determined that Cambridge’s conduct was violative of Rules 2010 and 3110.

This is not the first time that Cambridge has been sanctioned by FINRA for overcharging customers. Specifically, the securities broker dealer was censured and fined $250,000.00 based upon findings that exchange and rollover discounts were not processed for customers’ unit investment trust transactions in situations where customers were eligible to receive them. FINRA found Cambridge’s conduct to constitute violations of FINRA Rules 2010 and NASD Rules 2110 and 3010.