NYLIFE Securities LLC has been censured and fined by the Financial Industry Regulatory Authority (“FINRA”). According to FINRA’s findings of fact, NYLIFE failed to take reasonable steps to review its brokers’ short-term trades of Class A mutual funds, costing customers approximately $175,000 in unnecessary charges.

NYLIFE is a registered broker-dealer and a wholly-owned subsidiary of New York Life Insurance Company; it claims to provide investors with “world-class brokerage services” and a “wide variety of investment options.” Clients are able to purchase Class A mutual fund shares through NYLIFE.

NYLIFE’s Duties

The primary job of an investment firm  is to understand the investor’s needs and recommend investments that are suitable for those needs. Registered representatives must use due diligence to understand the investor’s expectations, how much they can afford to invest, and how much the investor can safely risk. Registered representatives owe a duty of care to their clients to ensure that they have accurately and appropriately assessed a client’s goal and risk tolerance before offering any advice about potential investment purchases or sales. An investment firm also has a legal duty to monitor the actions and recommendations of its representatives to make sure they are complying with FINRA rules and state and federal securities laws.

FINRA reports that NYLIFE failed to disclose unnecessary fees, inadequately assessed transaction suitability, and did not maintain its investment surveillance system.

NYLIFE surveilled for mutual fund transactions that it deemed letterable weekly and then sent letters to customers disclosing the mutual fund purchase and sale at issue. However, the firm failed to disclose the sales charges incurred on the transaction, and customers paid approximately $175,000 in unnecessary front-end sales charges, with the broker earning approximately $116,000 in commissions.

FINRA’s Charges Against NYLIFE

According to FINRA, registered representatives of NYLIFE were flagged if they had five or more letterable switches in a quarter. The firm’s compliance department and the representative’s supervisor would then attempt to determine if the affected customer received an overall benefit as a result of the transactions. However, NYLIFE allegedly did not have written supervisory procedures in place or adequately train its supervisors on how to determine if clients benefitted from the mutual fund switch transactions or whether the transactions were suitable for the client’s portfolio and risk tolerance. As a result, the firm’s compliance department typically closed the flagged transactions mainly on the supervisor’s allegedly inadequate review.

Furthermore, FINRA reports that NYLIFE failed to maintain a reasonable surveillance system for mutual fund and cross-product switches. As a result of a software upgrade, alleged database connectivity issues caused incomplete information to flow to the firm’s mutual fund and cross-product switching reports. In addition to flagged transactions being allegedly improperly reviewed and closed, FINRA estimates the switching reports missed thousands of mutual fund transactions. According to NYLIFE’s procedures, these transactions should have been reviewed, but the system reportedly failed to flag them.

NYLIFE reportedly conducted limited spot checks for mutual fund switching activity for ninety days following the software upgrade. The firm allegedly did not continue to monitor the system after ninety days. According to FINRA, the firm did not conduct any tests or monitor the cross-product switching reports for over four years.

FINRA determined that NYLIFE failed to take reasonable steps to review its brokers’ short-term trades of Class A mutual funds. As a result, the firm was censured, fined $200,000, ordered to pay $63,347 in restitution, and required to revise its written supervisory procedures.