FINRA Censures Firm for Failing to Apply Mutual Fund Sales Charge Waivers
Commentary by Jeff Ziesman
A firm settled FINRA charges for supervisory failures concerning eligible sales charge waivers and fee rebates.
In the AWC, FINRA explained that rights of reinstatement allow mutual fund investors, within a set period after redeeming shares, to repurchase shares in the same fund family without paying a front-end sales charge or to recover certain deferred sales charges. FINRA noted that this period, disclosed in fund offering documents, typically ranges from 30 to 120 days, but can extend up to two years.
FINRA found that the firm's customers transacted directly with mutual fund issuers. FINRA found that the firm relied on representatives and customers to "manually identify" and request these benefits and that the firm had no automated process to detect missed opportunities. FINRA determined that customers did not receive the reinstatement benefits to which they were entitled and paid $710,738.55 in excess charges and fees. FINRA concluded that the firm lacked a supervisory system designed to ensure eligible customers received mutual fund sales charge waivers and fee rebates available through rights of reinstatement.
FINRA determined that the firm violated FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision").
To settle the charges, the firm agreed to (i) a censure and (ii) pay $710,738.55 in restitution to affected customers, plus interest. FINRA credited the firm's "extraordinary cooperation" in that it: (i) reviewed and enhanced its supervisory systems and procedures; (ii) engaged an outside consultant to identify impacted customers and calculate remediation; (iii) implemented a plan to repay eligible customers and improve oversight of mutual fund transactions; (iv) made partial restitution of $90,563.18; and (v) provided substantial assistance to FINRA's investigation. In light of the firm's extraordinary co-operation, there was no monetary fine imposed.
Commentary
In longstanding regulatory guidance, FINRA states that it explicitly recognized the concept of "Credit for Extraordinary Cooperation." The key is that the cooperation must be "Extraordinary"—that is, it must be something more than that otherwise required under FINRA's Rules (such as responding completely and truthfully to a FINRA Rule 8210 request). Credit for Extraordinary Cooperation is maximized when: (1) the firm self-reports the violations to FINRA; (2) to the extent feasible, the firm conducts its own independent review and provides FINRA with results; (3) if customers suffer losses, the firm proactively identifies those customers and makes restitution, before FINRA requires the firm to do so; and (4) the firm provides substantial assistance to FINRA during FINRA's investigation.
This matter involves mutual fund rights of reinstatement ("ROI"). No fine was imposed, although the firm was required to make restitution of $710,738.55 plus interest (and at the time of the AWC the firm had already paid over $90,000 in restitution to impacted customers). Along with that proactive activity, the firm had also: (1) engaged an outside consultant to identify disadvantaged customers and calculate restitution; (2) established a plan to make restitution to customers; and (3) provided substantial assistance to FINRA in its investigation. All of these factors presumably led to FINRA electing not to impose any fine in the matter, even though the violations occurred for nearly 5 years (from August 2019 to July 2024).