I have written before about the troubling lack of clarity regarding the tangible benefit of self-reporting rule violations to FINRA. While FINRA purports to provide some potential advantage for doing so, it is so awfully loosy-goosy that it remains a relatively uncommon occurrence. That’s why when a case comes down that provides some clear indication (1) that there is, in fact, a benefit of self-reporting, and (2) what that self-reporting must look like to actually get some real credit for it, it is worth talking about.
Last week, Voya Financial Advisors entered into an AWC with FINRA to settle some supervisory charges relating to its sales of mutual funds. According to the facts outlined in the AWC, for over seven years, Voya failed to reasonably supervise the share class of mutual funds that it was selling to certain retirement plan and charitable organization customers. As a result of that failure, these customers either bought Class A shares and paid a front-end sales charge despite the fact a waiver of that charge was available, or were inappropriately sold Class B or C shares with a back-end sales charge and higher ongoing fees and expenses. Either way, it cost these customers more to buy these mutual funds than it should have, and had Voya had a better supervisory system, it wouldn’t have taken seven years for the firm to figure this out.
But, that’s not the story of this case. The story is that even though it took a long time for Voya’s lightbulb to go on, it still managed to illuminate before FINRA examiners could find the problem themselves, and the firm took significant steps right away to address the problem. Here’s how it played out.
In November 2015, the firm apparently determined it had an issue, and began an investigation of its sales of mutual funds to retirement plans and charities. About six months later, Voya formally self-reported to FINRA its problem. FINRA requested that Voya conduct a five-year look-back, to quantify the scope of the problem. For whatever reason, Voya decided that wasn’t good enough, and so volunteered to expand the look-back by an additional two years. Voya ultimately calculated that as a result of the over-charges, it owed its customers about $126,000, inclusive of interest. Of that sum, it is notable that nearly half was related to sales that had been made in the two-year time period that Voya voluntarily added to FINRA’s mandated look-back period.
In light of all the circumstances, particularly what FINRA characterized as Voya’s “extraordinary cooperation,” no fine was imposed in the AWC.
So, how do you, or your clients, achieve this same result? Simple, just follow Voya’s blueprint, as outlined in the AWC:
- Initiate your own internal investigation “prior to detection or intervention by a regulator”;
- promptly self-report to FINRA;
- voluntarily expand the look-back period that FINRA requests;
- establish a plan of remediation for customers who were impacted by your supervisory failure;
- promptly take action and remedial steps to correct the violative conduct; and
- take corrective measures, prior to detection or intervention by a regulator, to revise your procedures to avoid recurrence of the misconduct
I get that step (3) may not be applicable in all cases, and, even when it is applicable, there is no guarantee that you’ll “get lucky” like Voya and have that additional time period result in materially higher restitution to your customers, but, really, step (3) is just a bonus. It is the other five steps that will serve to augment your chances of avoiding a fine.
Bottom line, this is a good thing, and a positive development for FINRA. I mean, this makes two cases in two weeks – see my earlier blog on the Buckman settlement – in which FINRA has acted downright reasonably in terms of meting out sanctions, at least in settled cases. Let’s hope it’s just the start of a new trend.
