A Massachusetts securities regulator have charged regional broker/dealer Janney Montgomery Scott for failing to supervise a broker who frequently bought and sold front-loaded mutual funds to boost his commissions.
In a complaint filed Monday, Secretary of the Commonwealth William F. Galvin claimed the firm didn’t properly supervise Stephen Querzoli, a Danvers, Mass.-based advisor who allegedly short-term traded Class A shares of mutual funds.
While Class A shares tend to be more costly in the short term (with a front-loaded charge of around 5.75%), they tend to result in greater earnings for investors over a period of three to five years, according to the complaint. However, Querzoli would allegedly sell out of these funds in a matter of months, using the earnings to purchase more expensive mutual funds. During a six-year period, he raised almost $200,000 in fees, and Janney paid him about $78,776 in commissions, according to the complaint.
The complaint says Janney found evidence of Querzoli’s practices in 2015, when he was flagged for internal review “due to his consistently high switch activity relative to other registered representatives at the firm, his failure to achieve breakpoints for Class A shares, and his short hold periods for Class A shares.”
While the firm’s branch manager suggested he purchase lower-cost shares in appropriate circumstances, the investigation closed in 2016, the complaint alleged. He was later fired in November 2018.
Janney is located in Philadelphia, with several branches located in Massachusetts. The firm said it was aware of the charges Galvin filed.
"Janney takes its regulatory and client obligations seriously," a spokesperson said, in a statement. "We are aware of the complaint and will address the allegations filed by the Massachusetts Securities Division."
In the complaint, the Securities Division requests that Janney conduct a full review of Querzoli’s account, and compensate effected investors. Galvin’s office also asked the firm to “engage an independent compliance consultant to review and establish written policies and procedures related to the short-term trading of Class A shares of mutual funds.”
The charges follow a spate of oversight activity on the part of Galvin; in December, he fined New Jersey broker/dealer Summit Equities $100,000 for failing to properly supervise agents who mishandled clients’ personal information, and in late February Galvin’s division inquired about Fidelity Investments’ mutual fund fees. In late March, he charged two RIAs with using more than $11 billion in client assets to investments in securities with high risks.
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