Class A Mutual Fund Front-End and FINRA Back-End

January 3, 2018

Today's featured FINRA regulatory settlement involves the dubious practice of short-term trading in Class A mutual fund shares. With a new year upon us, the Financial Industry Regulatory Authority reminds the investing public to do its homework concerning Class A, B, and C mutual fund shares. It's a lesson well worth learning. As with much of FINRA's regulatory agenda, it's heart seems in the right place but the regulator can't quite get out of its own way and sort of stumbles. All of which reminds us of a golfer who looks great addressing the ball but doesn't quite follow through and shanks what should have been an otherwise good swing. 

Case In Point

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Brighton Securities Corp. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Brighton Securities Corp., Respondent (AWC 2015046536701, December 28, 2017).

The AWC asserts that Brighton has been a FINRA member firm since 1968 and employs about 30 registered personnel. The AWC asserts that the firm "has no relevant disciplinary history."

Unsuitable Recommendations

During the relevant period between March 2013 and March 2014, the AWC asserts that Brighton had failed to reasonably supervise the mutual-fund sales practices of a registered representative identified only as "CK." Pointedly, the AWC asserts that CK had:

frequently recommended the purchase and subsequent sale of Class A shares within a year of purchase. Indeed, on average, the customers held the Class A mutual funds at issue for less than four months. As a result of these short-term trades, five of the six customers suffered collectively losses of approximately $30,254.

FINRA Mutual Fund Investor Alert

In "Understanding Mutual Fund Classes" ( Investor Alert) , 
the self-regulatory-organization provides a brief, concise explanation of mutual fund attributes, including:

If You Buy Class A Shares:

Class A shares typically charge a front-end sales charge. When you buy Class A shares with a front-end sales charge, a portion of your dollars is not invested. Class A shares may impose an asset-based sales charge (often 0.25 percent per year), but it generally is lower than the charge imposed by the other classes (often 1 percent per year for B and C shares).

A mutual fund may offer you discounts, called breakpoints discounts, on the front-end sales charge if you:
  • Make a large purchase.
  • Already hold other mutual funds offered by the same fund family.
  • Commit to regularly purchasing the mutual fund's shares.
You should ask your financial adviser whether any breakpoint discounts are available to you. For more information, read our Investor Alert Mutual Fund Breakpoints: A Break Worth Taking.

If You Buy Class B Shares:

Class B shares typically do not charge a front-end sales charge, but they do impose asset-based sales charges that may be higher than those that you would pay if you purchased Class A shares. Class B shares also normally impose a contingent deferred sales charge (CDSC), which you would pay if you sell your shares within a certain period, often six years. For this reason, these shares should not be referred to as "no-load" shares. The CDSC normally declines the longer your hold your shares and, eventually, is eliminated. Within two years after the CDSC is eliminated, Class B shares often "convert" into lower-cost Class A shares. When they convert, they begin to charge the same fees as Class A shares.

Class B shares do not impose a sales charge at the time of purchase. So unlike Class A purchases, all of your dollars are immediately invested. But your annual expenses, as measured by the expense ratio, may be higher. You also may pay a sales charge when you sell your Class B shares.

If you intend to purchase a large amount of Class B shares (over $50,000 or $100,000, for example), you may want to discuss with your financial adviser whether Class A shares would be preferable. The expense ratio charged on Class A shares is generally lower than for Class B or C shares. The mutual fund also may offer large-purchase breakpoint discounts from the front-end sales charge for Class A shares.

To determine if Class A shares are more advantageous, refer to the mutual fund's prospectus, which may describe the purchase amounts that qualify for a breakpoint discount.

If You Buy Class C Shares:

Class C shares do not impose a front-end sales charge on the purchase, so the full dollar amount that you pay is invested. Often Class C shares impose a small charge (often 1 percent) if you sell your shares within a short time, usually one year. They typically impose higher asset-based sales charges than Class A shares and, since they generally do not convert into Class A shares, those fees will not be reduced over time.

Additionally, in most cases, your total cost would be higher than with Class A shares, and even Class B shares, if you hold for a long time.

Missed Warnings

The AWC alleges that Brighton failed to properly respond to various "warning signs" concerning CK's conduct; e.g.:

During her registration with Brighton, the Firm placed CK on heightened supervision five separate times for, among other issues, failing to follow company procedures, placing unauthorized trades in customer accounts, and exercising discretion in customer accounts without written authorization from the customers or Brighton. In addition, on several occasions, Brighton's supervisory personnel raised concerns regarding the "frequency" and "velocity" of CK's trading. And many of CK's short-term mutual fund trades occurred in the accounts of customers who were elderly and/or who had long-term investment objectives and conservative risk tolerances

Supervising Mutual Fund Transactions

The AWC further alleges that during the relevant period, Brighton's supervisory system was not reasonably detect unsuitable short-term trading or switching of Class A mutual fund shares because:

The Firm had no exception reports specific to Class A mutual fund shares, and no automated method of monitoring Class A mutual fund holding periods. Nor did the Firm impose any limitations on trading or holding Class A mutual funds.


The AWC asserts that "On March 26, 2014, following a review of CK's trading activities, Brighton filed a Form U5 terminating CK's registration with the Firm. . ." 

FINRA Sanctions

In accordance with the terms of the AWC, FINRA imposed upon Brighton a Censure, $50,000 fine, and $19,453.11 restitution plus interest to affected customers. Brighton previously provided $10,801.42 in partial remediation to 11 former customers of CK.

Bill Singer's Comment

I never quite get FINRA's policy -- assuming that there is, in fact, one -- as to why and when it hides an associated person's name from public disclosure. In settling disciplinary charges against its member firm Brighton, FINRA largely predicated its case, Censure, fine, and order of restitution upon the apparent misconduct of "CK," but the name of that individual is never set forth in the settlement document. Always up for a challenge, I searched FINRA's online database of disciplinary records using only the term "Brighton Securities" in the hope of finding something referencing a female registered rep with the initials "CK." That search produced a number of results among which was "Caroline F. Korn."

2012 Korn AWC

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Caroline F. Korn submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Caroline F. Korn, Respondent (AWC 2011029070101, October 22, 2012).

The Korn AWC asserts that Korn was first registered in 2005 and since December 16, 2005, she was registered with Brighton Securities Corp. The Korn AWC asserts that she had "no FINRA disciplinary history."

As set forth in the "FACTS AND VIOLATIVE CONDUCT" of the Korn AWC;

At various times from December 2010 through May 2011, Korn exercised discretionary power in the accounts of eleven customers. Korn, however, did not have written authorization from those customers to place discretionary trades. Moreover, she failed to obtain written acceptance of the accounts as discretionary from the Firm. By exercising discretion in customer accounts without written authority, Korn violated NASD Conduct Rule 2510(b) and FINRA Rule 2010.

In accordance with the terms of the AWC, FINRA imposed upon Korn a $5,000 fine; 15 business day suspension from association with any FINRA member in any capacity; and an order to re-qualify as general securities representative by passing the required examination(s) before reassociation with any member firm in that capacity.

Sweet Caroline?

According to online FINRA BrokerCheck records as of January 3, 2018, Brighton Securities "Discharged" Korn on March 24, 2014, based upon allegations that:


SIDE BAR By Bill: Ummm, if you guys at Brighton don't mind a little bit of friendly advice, you may want to tone down the sexism inherent in filing a regulatory disclosure for a veteran registered representative by calling her "Caroline" when virtually every such filing for a male would likely call the individual "Korn."

In response to her former firm's online disclosure, Korn stated that: