Philadelphia-based broker-dealer Janney Montgomery Scott LLC has been charged with allowing a broker in one of its Massachusetts branches to engage in mutual fund sales violations that cost investors almost $200,000 in unnecessary commissions over six years.
In an administrative complaint filed Tuesday, Secretary of the Commonwealth William F. Galvin charged Janney Montgomery Scott with failing to supervise registered representative Stephen Querzoli’s short-term trading of class A mutual fund shares between 2012 and 2017.
Mutual fund class A shares typically have higher front-loaded fees of up to 5.75 percent and lower annual expenses compared with other class shares and generally result in much higher commissions for brokers and advisors.
Though such shares are generally designed to be held for five years or more, the complaint alleged that “Querzoli would frequently sell clients’ mutual fund A shares after mere months, using the proceeds to purchase new mutual funds, which drove up the commissions charged to customers by thousands of dollars.”
The complaint alleges that Janney did little to stop its broker’s improper sales practices, leaving him unchecked even after flagging him for an internal review and opening their own inquiry in 2015, some three years into the period when the broker’s inappropriate sales began taking place.
The findings of Janney’s internal review of the broker’s customers found that, on average, Querzoli held class A shares for less than 12 and a half months.
While a Janney branch manager advised Querzoli that many of his clients would benefit from the purchase of mutual funds with lower front-loaded fees, Querzoli continued purchasing and selling class A shares, despite being monitored by his employer, Massachusetts alleged.
An employee who was overseeing the review of Querzoli’s trading activity stated during the investigation that she would check to see whether he was beginning to purchase fund shares with lower loads that are more appropriate for shorter-term trading, the Massachusetts complaint alleged. Janney’s investigation, however, was closed six months after it was open with no further action, Massachusetts said.
The broker continued to purchase class A shares for clients until his termination in November, the complaint alleged.
For example, in late 2012 Querzoli purchased $60,000 in class A shares for one Massachusetts customer, generating $2,312.50 in commissions. Less than six months later, he sold those class A shares for $55,712.85, generating a loss of $4,287 for the customer. He often used client proceeds to purchase new class A shares and generate fresh commissions for himself and Janney, Massachusetts alleged.