FINRA Share Class Sweep Highlights Importance of Cooperation

This week FINRA announced the final results of its Mutual Fund Waiver Initiative, through which it made an aggressive multi-year effort to ensure member firms were appropriately crediting clients with sales charge waivers they were entitled to.

According to Susan Schroeder, a FINRA executive vice president in the Department of Enforcement, the initiative resulted in a total of 56 settlements reached with member firms, collectively resulting in $89 million in restitution across some 110,000 charitable and retirement accounts.

Schroeder says all of the firms, including two firms agreeing to settlements just this week, 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. By way of context, many mutual funds waive the up-front sales charges associated with Class A shares for certain retirement plans and/or charitable organizations. Typically, Class A shares have lower fees than Class B and C shares, but charge customers an upfront sales charge. Many mutual funds waive their upfront sales charges on Class A shares for certain types of retirement accounts, and some waive these charges for charities.

According to FINRA, notwithstanding the common availability of such waivers, firms often fail to apply the waivers to mutual fund purchases made by eligible customers and instead sell shares with higher ongoing fees and expenses. FINRA enforcement staff believes these sales disadvantage eligible customers by causing such customers to pay higher fees than they were actually required to pay.

“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,” Schroeder says. “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.”

Initially, in 2015, FINRA reached settlements with 10 member firms who self-reported to FINRA that their sales representatives failed to consider applicable sales charge waivers for charitable and retirement plan accounts that had purchased mutual funds. At that time, FINRA 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.

Member firms continued to self-report the failure to offer mutual fund fee waivers, while FINRA 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 conduct a review of a group of firms that had not self-reported the issue. In the end, FINRA sanctioned 11 firms through the sweep, and reached settlements with another 35 firms, most of which self-reported prior to the sweep.

In total, FINRA has 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 granted “extraordinary cooperation” and not fined.

FINRA member firms should also be aware of another ongoing sweep, dubbed the 529 Plan Share Class Initiative. In January, FINRA announced via Regulatory Notice 19-04 that it was kicking off the sweep, and its staff encouraged advisers to self-report client duty of care violations in the selection of investments in tax-advantaged college savings accounts.