The Financial Industry Regulatory Authority is once again taking a close look at member firm mutual fund sales practices and sales charge waivers (Mutual Fund Waiver Sweep) in the U.S. FINRA’s target exam letter seeks information about mutual fund sales to retirement plans and charitable accounts, as well as the sales charge waivers that mutual funds make available to eligible purchasers. FINRA’s Mutual Fund Waiver Sweep covers the period from January 1, 2011 through December 31, 2015 and, as drafted, seeks responses from FINRA member firms by June 10, 2016.
FINRA is asking member firms if they have processes and supervisory controls to ensure that mutual fund sales charge waivers are provided to eligible accounts. FINRA is seeking member firm responses about: (a) their process and supervisory controls; (b) the time period the current process has been in effect; and, (c) if no process has been implemented, the reason a process is not necessary. If a member firm has changed its process or supervisory controls, FINRA is asking for an explanation of the changes, a description of the relevant changes, and information about when each change occurred and the events or actions that led to the change.
FINRA is also asking member firms if they have reviewed retirement plans and charitable accounts for missed sales charge waivers, and to describe any reimbursements. FINRA is further asking member firms about the availability of R shares and how the firms ensure that R shares were made available to eligible accounts.
Finally, FINRA is requesting copies of training materials furnished to supervisory personnel or sales staff specific to R shares or mutual fund share classes, during the relevant period.
In its request, FINRA notes that “This inquiry should not be construed as an indication that FINRA or its staff has determined that any violations of federal securities laws or FINRA, NASD, NYSE, or MSRB rules have occurred.”
FINRA’s Mutual Fund Waiver Sweep continues its focus on member firms’ practices related to waiving mutual fund sales charges for eligible accounts. In the past 11 months, FINRA has ordered 10 member firms to pay restitution – aggregating approximately $55 million – to over 75,000 eligible retirement accounts and charitable organizations as a result of the firms’ failure to waive mutual fund sales charges for Class A shares. In each case, FINRA found that, although the mutual funds available on the broker-dealers’ retail platforms offered fee waivers for Class A shares to charitable organizations or retirement plans at various times, the broker-dealers did not waive the sales charges when the relevant accounts purchased Class A shares. A copy of FINRA’s press releases can be found here and here.
This Mutual Fund Waiver Sweep is reminiscent of the 2004 joint action by the NASD (FINRA’s predecessor) and the Securities and Exchange Commission against several broker-dealers, and the NASD’s separate action against an additional eight of its member firms, for failure to deliver mutual fund breakpoint discounts during 2001 and 2002. The NASD’s press release with respect to such action is available here. These actions followed a joint SEC and NASD review of broker-dealers’ sales of front-end load mutual funds in 2001 and 2002. A copy of the SEC’s letter is available here. A copy of the SEC and NASD’s joint report on their exam findings is available here.
When responding to FINRA’s requests, one point to keep in mind is that, in announcing FINRA’s actions, Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, noted that cooperation credit was granted to firms that were “proactive in identifying and remediating instances where their customers did not receive applicable discounts.”
