On August 15, 2016, the Financial Industry Regulatory Authority (FINRA) accepted a Letter of Acceptance, Waiver and Consent (the Letter) from UBS Financial Services, Inc. (UBS) to settle alleged rule violations in connection with the firm’s failure to apply mutual fund sales charge waivers for certain eligible customers.
As the Letter explains, many mutual funds waive front-end sales charges if the fund is purchased pursuant to a right of reinstatement, which allows customers who have previously sold Class A shares to repurchase those shares at net asset value (NAV) without paying a front-end sales charge, provided certain conditions are met. In most cases, the customer must reinvest the proceeds from an earlier redemption of a Class A mutual fund in the same fund or fund family within a period of time specified in the prospectus, typically within 90 to 180 days. If these conditions are satisfied, the mutual fund waives the front-end sales charge.
FINRA alleged that, from about September 2009 through about June 2013 (the Relevant Period), UBS failed to provide approximately 2,700 customers with mutual fund sales charge waivers to which they were entitled through rights of reinstatement, resulting in the payment of $277,636 in excess sales charges. FINRA also alleged that during the Relevant Period, UBS failed to establish, maintain and enforce a supervisory system and written supervisory procedures reasonably designed to ensure that all eligible mutual fund investors received sales charge waivers available through rights of reinstatement. The Letter states that UBS employed a “NAV Reinstatement Report” (the Report) to monitor whether its registered representatives were appropriately identifying and applying available sales charge waivers under rights of reinstatement. However, FINRA alleged that this Report was deficient because it only monitored mutual fund trades exceeding $5,000 in amount and failed to monitor any transactions for approximately 20 of the funds sold by UBS. Consequently, FINRA also alleged that UBS had no supervisory system or procedures to review or test the Report to ensure that it was accurate, complete and functioning as intended.
For these alleged violations of NASD Conduct Rule 3010 and FINRA Rule 2010, UBS consented to the imposition of a censure and a fine in the amount of $250,000.