The Financial Industry Regulatory Authority ("FINRA") continues to bring significant enforcement actions relating to firms’ alleged failure to provide certain retirement account holders and charities the sales charge waivers to which they may be entitled. FINRA has found in these enforcement actions that the failure to identify these sales charge waivers and make them available to clients is a violation of NASD Conduct Rule 3010 (for conduct occurring prior to December 31, 2014) and a violation of FINRA Rules 2010 and 3110 (for conduct occurring after December 31, 2014).
In the most recent wave of Acceptance, Waiver and Consents ("AWC’s"), which FINRA released on July 6, 2015, LPL Financial LLC, Raymond James & Associates, Inc. and Wells Fargo Advisors, LLC were ordered collectively to pay more than $30 million in restitution, including interest, to affected customers for allegedly failing to waive mutual fund sales charges for certain charitable and retirement accounts. Over 50,000 accounts are estimated to be the subject of these actions. Additionally, LPL agreed to continue paying restitution to eligible customers who purchase or purchased mutual funds without an appropriate sales charge waiver from January 1, 2015, through the date that the firm fully implements training, systems and procedures related to the supervision of mutual fund sales waivers.
FINRA previewed its focus on this issue in its 2015 Exam Priorities Letter, which followed the Merrill Lynch AWC on this same issue and was released in June 2014. In each of these cases, FINRA has found an alleged failure to adequately supervise the sale of mutual funds that offered sales charge waivers. Further, FINRA has found that it generally is unreasonable for firms to rely on financial advisors to waive charges for retirement and eligible charitable organization accounts, absent more specific information and targeted training.
In each of the enforcement matters noted above, the firms identified the potential issue with the application of sales charge credits, conducted their own investigations, and self-reported to FINRA. No fines were levied and FINRA noted in each of the AWC’s the firms’ self-reporting and cooperations in remediating the issuer. FINRA Rule 4530 requires firms to self-report "conduct that has widespread or potential widespread impact to the member, its customers or the markets." Accordingly, firms should analyze whether they have any violations on the subject of fee waiver, and also assess whether any such violations are sufficiently pervasive to meet the Rule 4530 threshold.
We anticipate that FINRA will continue subjecting firms to scrutiny on this issue. This may be done in a sweep, routine examinations or through some other means. Consequently, we again encourage firms to review their retail brokerage platforms to determine which families’ funds are represented on that platform, which funds offered fee waivers going back at least five years (and perhaps to January 1, 2009), and assess whether customers holding retirement or charitable accounts have been afforded available fee waivers. Based on our detailed review of over 100 fund families, it is evident that the availability of fee waivers varies widely across fund families and potentially from year to year. These variations raise significant challenges in both the supervision of mutual fund sales activity relating to fee waivers, and in identifying the scope of any customer fee waiver remediation.
Copies of the three AWCs can be found at the following links:
A recent presentation providing a high-level summary of this issue can be found here.