Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, October 16, 2008

FINRA Fines Banorte Securities Int'l for Unsuitable Class B Stock Sales

FINRA imposed a $1.1 million fine on Banorte Securities International, Ltd. for unsuitable sales of Class B shares in off-shore mutual funds as well as failing to have adequate supervisory systems to monitor those sales.  As part of this settlement, the firm agreed to a remediation plan that will address over 1,400 transactions in the accounts of more than 300 customer households. Banorte Securities International, which is headquartered in New York, is part of an affiliated group of companies that includes a Mexican broker-dealer and a Mexican bank. The majority of the firm's customers live in Mexico.

FINRA found that Banorte Securities International recommended Class B shares of off-shore mutual funds to its customers in certain transactions where the customers would have financially benefited from purchasing Class A shares - particularly since the firm had negotiated lower front-end sales charges for off-shore mutual fund Class A shares with several mutual fund companies. FINRA further found that the firm's written policies and procedures did not require its registered representatives to weigh the economic consequences of purchasing different share classes or to explain those consequences to customers. Moreover, Banorte Securities failed to provide guidelines that instructed registered representatives that Class A share off-shore mutual fund purchases eligible for these low front-end loads were generally cheaper for customers than Class B shares.

During 2003 through May 2004, most mutual fund sales at Banorte Securities were in Class B shares, despite the fact that the low front-end loads available to the firm's customers meant that an investment in Class A shares generally yielded a higher return than a similar investment in the Class B shares.

The firm settled this matter without admitting or denying the allegations, but consented to the entry of FINRA's findings.

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