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Regulatory Sanctions

Another Broker-Dealer Nabbed in FINRA Mutual Fund Sweep

June 10, 2019

by Howard Haykin


ProEquities, Inc., a FINRA member since 1984, recently joined an ignominious list of broker-dealers who sold front-loaded Class A mutual fund shares to certain customers that were eligible to purchase those same Class A shares without a front-end sales charge. All these cases relate to a FINRA sweep that dates back to early 2017 – and to this day continues to ‘take prisoners’.
What differentiates this case from many others is that ProEquities was required to pay restitution to eligible customers ($153K in restitution and interest) – and was not otherwise fined or sanctioned. Continue reading to find out why.



Between January 2011 and March 2016, ProEquities (with its 1,051 registered reps and 531 branch offices) disadvantaged certain retirement plan and charitable organization customers that were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge ("Eligible Customers"). These Eligible Customers were instead sold Class A shares with a front-end sales charge or Class B or C shares with back-end sales charges and higher ongoing fees and expenses. By its own estimates, ProEquities overcharged eligible customers by approximately $137,000 (and including implied interest, the firm owed these customers $158,000).


According to FINRA, ProEquities had relied on its financial advisors to determine the applicability of sales charge waivers – in the absence of reasonable written policies or procedures to assist financial advisors in making this determination. As a result, ProEquities violated NASD Conduct Rule 3010 (prior to 12/1/14), FINRA Rule 3110 (on or after 12/1/14), and FINRA Rule 2010.



PROEQUITIES AVOIDED A FINE AND OTHER SANCTIONS.    FINRA typically applies severe sanctions to firms that are repeat offenders – i.e., that have a ‘Relevant Disciplinary History’. Yet, that didn't happen to ProEquities which, in November 2015, settled FINRA charges that it failed to apply sales charge discounts to certain customers' eligible purchases of unit investment trusts. In that case, ProEquities agreed to pay a fine of $165,000 and restitution to customers $110,000.


       ►   ProEquities' Investigation in This Case.   In October 2015, ProEquities advised FINRA it was undertaking a review to determine whether it provided available sales charge waivers to Eligible Customers. By July 2016, ProEquities determined that approximately 350 of its customer accounts had been disadvantaged on mutual fund share purchases, and were overcharged by more than $136,000.


       ►   Other Factors.    FINRA credits ProEquities with representing that it will ensure that retirement and charitable waivers are appropriately applied to all future transactions. FINRA further recognizes ProEquities for its ‘extraordinary cooperation’ in:


  • initiating an investigation to identify whether Eligible Customers received sales charge waivers during the Relevant Period;
  • undertaking a self-review of Eligible Customer accounts, before FINRA initiated its investigation;
  • providing restitution to Eligible Customers for the relevant period;
  • promptly establishing a plan of remediation for Eligible Customers who did not receive appropriate sales charge waivers; and,
  • promptly taking action and remedial steps to correct the violative conduct, including programming changes to preclude ongoing customer harm while the Firm instituted permanent systems upgrades.



FINANCIALISH NOTE:  It's altogether clear or apparent from FINRA's write-up that ProEquities, in actuality, self-reported its violative conduct and initiated its investigation without prompting or 'nudge' from FINRA. That said, Financialish is willing to accept FINRA's statements on face value.



Class A shares typically are subject to a front-end sales charge when originally purchased, and have annual fund expenses, including ongoing distribution and service fees ("fees") that are typically 0.25 percent. The majority of the front-end charge is paid to the selling broker-dealer as a concession. Investors purchase Class A shares at the applicable Net Asset Value ("NAV"), plus the initial sales charge.
Most funds, however, offer certain investors a waiver of the initial sales charge associated with Class A shares under certain circumstances ("sales charge waiver") – i.e., certain retirement plans and charitable organizations.
Class B and C shares typically do not carry a front-end sales charge but have significantly higher distribution and service fees (typically 1.00 percent) and may be subject to a contingent deferred sales charge. Some mutual funds offer Class R shares for purchase by certain retirement plans. Class R shares typically are sold without a front-end sales charge. However, Class R shares typically have higher fees than Class A shares.



This case was reported in FINRA Disciplinary Actions for May 2019.

For further details, click on...  FINRA AWC #2016052179401.