by Howard Haykin

Since April 2017, FINRA has reported disciplinary sanctions against 21 broker-dealers that inappropriately sold expensive shares of mutual funds to retirement plan and charitable organization customers. While all 21 firms agreed to provide restitution to impacted customers, only 7 of those firms paid fines. WHY SO?

The decision to impose a fine was not based on the facts and circumstances of each FINRA case, or “AWC’” (Letter of Acceptance, Waiver and Consent).

Each case essentially offered the identical scenario: institutional customers were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge. Yet, they were sold classes of mutual fund shares that carried sales charges - i.e., front-end, back-end, and/or high 12b-1 fees. As a result, these “eligible customers” overpaid on mutual fund fees and expenses, while the broker-dealers collected wrongfully-earned 12b-1 fees.

The decision to impose a fine, and the amount of any resultant fine, was not based on how much customers had been overcharged. 

►   Investment Centers of America was fined $60K while its customers were overcharged by about $154K.

►   SII Investments was fined $75K while its customers were overcharged by nearly $1 million – or about $966K.

►   Woodbury Financial Services was fined $75K while its customers were overcharged by about $114K.

►   BB&T Investment Services received -0- fine, while its customers were overcharged by about $332K.

FIRMS THAT WERE NOT FINED.   

Firms received no fines when they conducted so-called self-directed investigations and self-reported their findings to FINRA. Take for example, J.P. Turner & Company, whose customers were cheated out of overcharged by ~$332,000. 

In FINRA AWC #2016050260101, J.P. Turner was cited for its ‘Investigation and Self-Reporting to FINRA’ and ‘Other Factors’. 

In September 2015, JPTC began a review to determine whether the Firm provided available sales charge waivers to Eligible Customers. Based on this review, on September 10, 2015, JPTC self-reported to FINRA that Eligible Customers may not have received available sales charge waivers. JPTC estimates that, during the Relevant Period, approximately 93 customers purchased mutual fund shares for which an available sales charge waiver was not applied. As a result of the failure of JPTC to apply available sales charge waivers, the Firm estimates that Eligible Customers were overcharged by approximately $176,147 for mutual fund purchases made since July 1, 2009. As part of this settlement, JPTC agrees to pay restitution to Eligible Customers on the terms specified below, which is estimated to total approximately $213,137 (i.e., the amount Eligible Customers were overcharged, inclusive of interest).

 

In resolving this matter, FINRA has recognized the extraordinary cooperation of JPTC for having: (1) initiated, prior to detection or intervention by a regulator, an investigation to identify whether Eligible Customers received sales charge waivers during the relevant period; (2) promptly established a plan of remediation for Eligible Customers who did not receive appropriate sales charge waivers; (3) promptly self-reported to FINRA; (4) promptly taken action and remedial steps to correct the violative conduct; and (5) employed subsequent corrective measures, prior to detection or intervention by a regulator, to revise its procedures to avoid recurrence of the misconduct.

FIRMS THAT RECEIVED NOMINAL FINES.   

Firms were assessed nominal fines after they conducted so-called self-directed investigations and self-reported their findings to FINRA - after learning that FINRA had identified mutual fund deficiencies during examinations of their affiliates. Take for example, National Planning Corporation, whose customers were cheated out of overcharged by ~ $521,000.

In FINRA AWC # 2015046915901, National Planning Corporation was cited for its ‘Investigation and Self-Reporting to FINRA’ and ‘Other Factors’.

In February 2015, FINRA initiated an examination of NPC's affiliate, during which FINRA staff identified potential missed sales charge waivers. Shortly after, in August 2015, NPC began a review to determine whether the firm provided available sales charge waivers to Eligible Customers. Based on this review, in September 2015, NPC self-reported to FINRA that Eligible Customers had not received available sales charge waivers. NPC estimates that, since January 1, 2011, approximately 381 customers purchased mutual fund shares for which an available sales charge waiver was not applied. As a result, NPC’s failure to apply available sales charge waivers, the firm estimates that its Eligible Customers were overcharged by approximately $521,370 for mutual fund purchases made since January 1, 2011. NPC will also ensure that retirement and charitable waivers are appropriately applied to all future transactions.

 

In resolving this matter, FINRA has recognized the extraordinary cooperation of NPC for having: (1) initiated, prior to detection or intervention by a regulator, an investigation to identify whether Eligible Customers received sales charge waivers during the relevant period; (2) promptly established a plan of remediation for Eligible Customers who did not receive appropriate sales charge waivers; (3) promptly self-reported to FINRA; (4) promptly taken action and remedial steps to correct the violative conduct; and (5) employed subsequent corrective measures, prior to detection or intervention by a regulator, to revise its procedures to avoid recurrence of the misconduct.

FIRMS THAT RECEIVED LARGER FINES.   

Firms were assessed larger fines following FINRA’s May 2016 ‘Mutual Fund Waiver’ Sweep Exam. Woodbury Financial Services, which participated in FINRA’s sweep exam, had cheated overcharged its customers by ~$114,000. Upon learning of FINRA’s findings, Woodbury’s affiliate, FSC Securities Corporation, conducted an internal review which revealed that it had cheated overcharged its customers by ~$381,000. The firms were fined $75,000 and $100,000, respectively.

[Click here for the names of the 21 firms:  FINRA ‘Mutual Fund Waiver Sweep’ – Part 1; and, FINRA Mutual Fund Sweep Claims Sanctions Against 9 More Firms.