Broker-Dealers Settle FINRA Charges for Failing to Waive Certain Mutual Funds Sales Charges
Two broker-dealers settled FINRA charges (see here and here) for failing to waive mutual funds sales charges for eligible customers.
According to the FINRA Letters of Acceptance, Waiver and Consent, Western International Securities, Inc. ("Western") and Park Avenue Securities LLC ("PAS") failed to apply available sales charge waivers to certain retirement plan and charitable organization customers ("Eligible Customers") who purchased Class A shares. FINRA found that Western and PAS both sold Class A shares with front-end sales charges or Class B or C shares with back-end sales charges to their Eligible Customers. In addition, Western and PAS failed to maintain a supervisory system that would have ensured that Eligible Customers received the appropriate sales charge waivers. FINRA found that this conduct violated FINRA Rules 3110 and 2010.
Western agreed (i) to a censure, (ii) to pay a fine of $75,000 and (iii) to provide remediation to Eligible Customers who did not receive mutual funds sales charge waivers. PAS agreed (i) to a censure and (ii) to provide remediation to Eligible Customers who did not receive mutual funds sales charge waivers. FINRA also recognized PAS's extraordinary cooperation in resolving the matter.
Commentary
These cases serve as an example of FINRA's approach to cooperation credit. In the settlements, FINRA credited PAS for its extraordinary cooperation, and although PAS engaged in similar conduct and charged significantly more in unauthorized fees than Western, PAS did not pay a penalty while Western paid $75,000. What exactly did PAS do to earn extraordinary credit? According to the FINRA letter, it (1) initiated an internal investigation into the issue before any detection or intervention by a regulator; (2) promptly established a plan and began providing remediation to customers; and (3) promptly took action to correct the misconduct. While the decision whether to cooperate is a complicated one in many cases, these cases provide a useful case study in what counts as extraordinary cooperation to FINRA and the benefit that a party can expect to receive in return.