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FINRA Mutual Fund Waiver Initiative Snags 56 Member Firms

Regulatory Compliance

The Financial Industry Regulatory Authority has reached settlements with 56 broker-dealer member firms and obtained $89 million in restitution for nearly 110,000 charitable and retirement accounts resulting from its mutual fund fee waiver initiative. 

According to FINRA’s July 17 announcement, all of the firms 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 with the goal of obtaining meaningful restitution for mutual fund investors who were not afforded the sales charge waivers they were entitled to,” stated Susan Schroeder, FINRA Executive Vice President and head of Enforcement. “Ensuring that harmed customers are made whole is our highest priority and in some instances, FINRA granted credit for extraordinary cooperation to those firms who were proactive in identifying and fixing the issue, and who quickly remediated affected customers.” 

FINRA in 2015 initially reached settlements with 10 firms that self-reported that their sales representatives failed to consider applicable sales charge waivers for charitable and retirement plan accounts that had purchased mutual funds. The organization found that although the mutual funds available on the firms’ retail platforms offered these fee waivers to charitable and retirement plan accounts, at various times dating back to at least July 2009, the firms did not waive the sales charges when they offered Class A shares to these customers. FINRA also found that these firms failed to reasonably supervise the application of sales charge waivers to eligible mutual fund sales.

Even though member firms continued to self-report the failure to offer mutual fund fee waivers, FINRA says that it discovered the same problem at other firms during examinations. As a result, in May 2016 FINRA launched a targeted exam– known as a sweep – to review a group of firms that had not self-reported the issue. Consequently, FINRA sanctioned 11 firms through the sweep and reached settlements with another 35 firms, most of which self-reported prior to the sweep. 

Overall, of the 56 firms that were sanctioned for failing to waive mutual fund sales charges and failing to reasonably supervise the area, 43 were granted “extraordinary” cooperation and not fined, FINRA noted (see below). The remaining 13 firms were fined a total of $1.32 million.

Extraordinary Cooperation

On July 11, FINRA issued supplementary guidance (Regulatory Notice 19-23) providing clarification and additional information about how the organization assesses whether a potential respondent’s cooperation is “extraordinary.” To encourage firms and individuals to be proactive and take voluntary steps beyond those required under FINRA rules, the organization’s enforcement department credits extraordinary cooperation so that the outcome of the matter is materially different than it would have been absent the respondent’s extraordinary conduct.

FINRA says that as it has done in the past, it will continue to look to the factors set forth in both the Sanction Guidelines and Regulatory Notice 08-70 when determining whether credit will be given for extraordinary cooperation. Those factors include the timeliness and quality of a potential respondent’s corrective measures and other cooperative steps aimed at broadly and quickly remediating harm.

When FINRA determines that credit should be given for extraordinary cooperation, that credit may take many forms, the organization explains. For example, where a problem has been fully remediated, FINRA may conclude that no enforcement action is warranted and close an investigation with no further action or with a Cautionary Action Letter. 

In other cases, FINRA says that it might determine that an enforcement action is appropriate to remedy or prevent harm, but will provide credit by reducing the sanctions imposed. When credit is given in the form of a reduced fine, the reduction normally will be substantial. In appropriate cases, FINRA says it may also consider imposing formal discipline without any fine.