As we previously reported, the Financial Industry Regulatory Authority (FINRA) identified in its Regulatory and Examinations Priorities Letter for 2015 (the "Letter") the failure to provide clients sales charge discounts and fee waivers to which they may be entitled as an area of concern. FINRA notes in its Letter that in some cases retirement account holders and charities are not afforded sales charge waivers to which they may be entitled. The failure to identify these sales charge waivers and make them available to clients has been deemed a violation of FINRA Rule 2010 (essentially identical to old NASD Rule 2110), as well as NASD Rule 3010.
The potential implications of this issue are best demonstrated by the Acceptance, Waiver and Consent ("AWC") entered into by Merrill Lynch last June. In connection with that AWC, FINRA found that over approximately a 5 year period, Merrill failed to identify accounts eligible for a sales charge waiver (including retirement and charitable accounts) and to apply the waiver. Ultimately, Merrill agreed to an $8 million fine, a censure, and restitution of $24.4 million - all of which was in addition to remuneration of $64.8 million Merrill had already paid voluntarily to effected customers. Additionally, although not pursuant to an AWC, in the last quarter of 2014, Raymond James took a $10.5 million accounting adjustment associated with fund commissions. Raymond James identified a potential issue with the application of sales charge credits in certain qualified plan and charitable trust accounts and voluntarily began refunding charges to customers.
Based on FINRA's 2015 Letter, the Merrill AWC, and Raymond James’ voluntary accounting adjustment, we anticipate FINRA will be subjecting other firms to scrutiny.
Firms should review their retail brokerage platforms to determine which fund families’ fund are represented on that platform, and assess whether customers holding retirement or charitable accounts have been afforded available fee waivers. Firms should then assess whether they are actually consistent with the terms of the various prospectuses. We have found, in a detailed review of over 100 fund families, that the availability of fee waivers can vary widely across fund families. Accordingly, there can be significant challenges in both the supervision of mutual fund sales activity relating to fee waivers, as well as challenges in identifying, on a retroactive basis, issues with respect to affording customers fee waivers.