FINRA Sanctions 56 Member Firms; Credits 43 Granted Extraordinary Cooperation (Pay No Fines!)

The Financial Industry Regulatory Authority (FINRA) recently updated its guidelines for “Extraordinary Cooperation,” a process by which FINRA members could proactively monitor their activities and then alert the Authority to any regulatory issues.

This week FINRA announced that as part of its mutual fund fee waiver initiative, it reached settlements with 56 member firms and harvested a total of $89 million in restitution for nearly 110,000 charitable and retirement account. All of the firms sanctioned had failed to waive mutual fund sales charges for the eligible accounts and failed to reasonably supervise the sale of mutual funds offering sales charge waivers.

“This was a multi-year effort,” says FINRA Executive Vice President, Department of Enforcement Susan Schroeder, “with the goal of obtaining meaningful restitution for mutual fund investors who were not afforded the sales charge waivers they were entitled to.”

Importantly, for FINRA members, Schroeder also says the Authority “granted credit for extraordinary cooperation to those firms who were proactive in identifying and fixing the issue, and who quickly remediated affected customers.”

Neglecting to waive upfront charges

There are several classes of mutual funds shares, each with different sales charges and fees. Class A shares typically have lower fees than Class B and C shares, but charge customers an upfront sales charge. Many funds waive those charges for certain types of retirement accounts, and some waive the charges for charities.

At issues is those sales representatives who failed to consider whether sales charges should be waived for the identified groups. In 2015, FINRA reached settlements with ten member firms who self-reported that their sales representatives failed to consider applicable sales charge waivers for charitable and retirement plan accounts that had purchased mutual funds, despite having done so several times over the previous six years. FINRA noted the failure to reasonably supervise the application of sales charge waivers to eligible mutual fund sales.

Meanwhile, other member firms continued to self-report the failure to offer mutual fund fee waivers. And FINRA discovered the same problem at other firms during examinations. As a result, FINRA launched a targeted exam (sweep) in May 2016 to review of a group of firms that had not self-reported the issue.

Eleven firms were sanctioned as a result of the sweep. FINRA also reached settlements with another 35 firms, most of which self-reported prior to the sweep. In total, FINRA sanctioned 56 firms for failing to waive mutual fund sales charges for eligible charitable organizations and retirement accounts and failing to reasonably supervise the area. Of the 56 firms sanctioned, 43 were credited with extraordinary cooperation and not fined. The remaining 13 firms were fined a total of $1.32 million in addition to their share of the $89 million in restitution.

Restitution is costly. Fines are even more costly.

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