by Howard Haykin

A broker with UBS Financial Services agreed to pay a $10K fine and serve a 45-day suspension to settle FINRA charges that he recommended and effectuated a sequence of mutual-fund transactions designed to avoid the mutual fund’s “soft close” to new investors. In doing so, he effectively bypassed systems and restrictions that his member firm had put in place to abide by such mutual-fund soft closes.

WHAT'S A MUTUAL FUND “SOFT CLOSE?”  Open-end mutual funds that will no longer accept money from new investors (the investing public) but will allow its existing shareholders to continue buying shares of the fund, are said to be performing a "soft close."

The typical motivation is to protect the interests of existing investors by ensuring that the fund does not become too big for its market and style. Take, for example, a fund whose mandate is to invest in niche areas and less liquid market - e.g., smaller companies. Unchecked growth of that fund might require the managers to change their approach, which would compromise the very performance that attracted investors in the first place.

FINRA FINDINGS.    In June 2014, a mutual fund company announced that it was closing one of its funds to new investors. At the time of the soft close, a UBS broker and several of his customers were shareholders of the fund. In February and March 2015, the broker decided to recommend this mutual fund to some of his other customers and tried to buy shares for them using UBS's electronic order entry system. The orders were blocked by the system, with alerts advising: "Fund is grandfathered and cannot be purchased," and "These mutual fund shares are not eligible in this account."

To get around the restrictions imposed by the firm's system, the broker arranged for one of his customers who already owned shares of the mutual fund to transfer a share to another customer who did not own shares. Once that share was transferred, the firm's system allowed the broker to buy additional shares of the fund in the 2nd customer's account.

The broker arranged for the transfer of one of those shares from customer #2 to a 3rd customer's account, which allowed him to buy additional shares for that 3rd customer. Over the course of several weeks in February and March 2015, the broker repeated this pattern to enable 17 different customers to bypass the mutual fund's soft close.

This case was reported in FINRA Disciplinary Actions for May 2018.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016049307001.