Somewhere along the line, someone(s) at TD Ameritrade, Inc. failed to take action when notified by the service provider that it could not make delivery by settlement date. The discount broker relied upon a 3rd-party service provider to deliver prospectuses, including mutual fund prospectuses, as required and within required time frames. TD Ameritrade Outsourced Prospectus Deliveries. TD Ameritrade ("TDA") was required to provide its customers who purchased mutual funds a prospectus for that fund no later than 3 business days after the transaction.  To fulfill that obligation, TDA used a 3rd-party service provider to make deliveries of prospectuses, including mutual fund prospectuses. Each day, TDA forwarded to the service provider an electronic file containing a list of all transactions requiring customer delivery of a prospectus.  In response to the list, TDA received daily reports from the service provider identifying, among other things, all mutual fund transactions for which the service provider had been unable to deliver a prospectus to the firm customer by the settlement date (the exceptions).  An explanation code was provided for each exception identified in the reports. TDA required Operations each day to review the reports, correct any issues identified as exceptions, and provide the updated information back to the service provider in order to ensure that the service provider delivered the appropriate offering documents.  The firm’s personnel had daily contact with the service provider’s personnel to resolve exceptions on the reports, along with other issues relating to delivery of prospectuses. FINRA's Specific Findings. For all of 2009, FINRA found that mutual fund (MF) prospectuses were not delivered to customers on time for some 73,000 mutual fund transactions.  The firm, through its service provider, was obligated to have those prospectuses in customers' hands within 3 business days of the transaction. FINRA learned how the delivery problems arose and what prevented such issues from being resolved as soon as practicable - though it's not explained how or why TDA personnel made the decisions it did.  Let's follow the bouncing ball:

• The primary cause of the problem was the failure of certain mutual fund companies to maintain adequate supplies of paper copies of prospectuses.
• This failure impacted both the service provider and TDA from getting prospectuses into customers' hands on time.
• However, TDA apparently did not take steps to influence the MF companies to keep adequate stocks of prospectuses.
• Nor did TDA, for whatever reason, utilize readily available alternative options  - e.g., the service provider offered to print on-demand mutual fund prospectus, in which the provider could have obtained electronic copies of prospectuses from MF companies that offered them, then print and deliver the prospectus to the customers.
• It's not as though TDA operations personnel were not aware of the problems - they knew which customers were not receiving prospectuses from the daily reports, and were in daily contact with the service providers on resolving delivery exceptions.
• It's not as though TDA officials were not aware of the delivery problems, because they met quarterly with the service provider to go over, among other things, statistical data for MF prospectus deliveries - including statistics on delivery exceptions - which accounted for 4-5% of MF transactions conducted by TDA.

FINRA Sanctions. TD Ameritrade  was fined $100,000.   For further details, go to:   [FINRA AWC #2010022922701].   [Disciplinary Actions for October 2011]