Waive or Pay: FINRA Reaches Final Settlements in Its Mutual Fund Waiver Initiative

Justice Brandeis once famously said that sunlight is the best disinfectant. Perhaps, but in FINRA’s purview, settlements might be better. Along these lines, FINRA recently announced that it has reached final settlements in its nearly four-year initiative to obtain restitution from member firms that allegedly failed to waive mutual fund sales charges. These firms also allegedly failed to properly supervise the sale of mutual funds that offer sales charge waivers. The settlements were substantial: 56 member firms agreed to pay $89 million in restitution for 110,000 charitable and retirement accounts.

FINRA’s initiative specifically focused on mutual funds that offered Class A shares. These mutual funds often charge customers up-front sales charges but also often waive the sales charges for certain types of retirement accounts and charities. Dating back to 2009, FINRA specifically found that “although the mutual funds available on the firms’ retail platforms offered these fee waivers to charitable and retirement plan accounts … the firms did not waive the sales charges when they offered Class A shares to these customers.”

Multiple firms self-reported their failures to waive. FINRA, however, launched targeted sweeps of non-reporting firms to gather information on the potential failures of these firms to report and waive. While FINRA sanctioned 56 firms for failures to waive and all were required to pay restitution to charitable and retirement accounts, 43 of them were granted extraordinary cooperation and not fined. The remaining 13 firms were fined a total of $1.32 million. Thus, an appropriate lesson to be gained is if a Mutual Fund offers to waive a sales charge, the broker-dealer is expected to make the same offer.  Firms must ensure that its brokers are adequately trained to recognize when such waivers have been offered and to have in place a process and supervisory controls to ensure that waivers are offered to eligible accounts, when appropriate.  FINRA considers a failure to do so a violation of Rule 2010 – Standards of Commercial Honor and Principles of Trade and Rule 3110.

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About the Author: Sandra D. Grannum

Sandra Dawn Grannum concentrates her practice on securities, broker/dealer arbitration, litigation, mediation and regulatory defense. She is co-chair of the Commercial Litigation Team.

Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. She has represented brokerage firms, banks, clearing firms, and associated persons in over 60 arbitrations before the NASD and FINRA which have been tried through award. In addition, she has successfully pursued cases in state and federal courts and in adversarial proceedings before bankruptcy courts.

About the Author: Jamie L. Helman

Jamie L. Helman concentrates her practice on securities, broker-dealer arbitration, litigation, mediation, employment matters, and regulatory defense. She has experience first-chairing FINRA arbitrations, defended on-the-record testimony of broker-dealer employees before FINRA, and is presently involved in the representation of broker-dealers in several pending FINRA cases as well as regulatory matters.

About the Author: Edward J. Scarillo

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