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Regulatory Sanctions

FINRA ‘Mutual Fund Waiver Sweep’ – Part 1

December 4, 2017

by Howard Haykin


Since April 2017, FINRA has reported disciplinary sanctions against 12 broker-dealers that sold mutual funds to retirement plan and charitable organization customers. While these institutional customers were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge, the broker-dealers instead sold classes of mutual fund shares that carried sales charges - i.e., front-end, back-end, and/or high 12b-1 fees. As a result, these “eligible customers” paid higher fees and expenses than they were actually required to pay.


All told, the 12 broker-dealers were ordered by FINRA to compensate their customers for nearly $11 million in overcharges plus pre-judgment interest. Additionally, 3 of the firms were hit with fines totaling $195,000.



In April, FINRA sanctions were reported against: 

  • Investment Centers of America;
  • National Planning Corporation Investment Centers of America;
  • SII Investments.

[for details on these cases, click on, 4/26]


In June, FINRA sanctions were reported against:

  • Legend Equities Corporation.

[for details, click on, 7/12]


In July, FINRA sanctions were reported against: 

  • Cetera Advisor Networks;
  • Cetera Advisors;
  • MSI Financial Services.


In October, FINRA sanctions were reported against:

  • Cetera Financial Specialists;
  • Cetera Investment Services;
  • First Allied Securities;
  • Girard Securities;
  • Summit Brokerage Services.


FINRA FINDINGS.    The facts and circumstances of all 12 cases are strikingly similar – with minor differences that do not materially affect the relevant findings of the cases. Each case begins with the premise that … many mutual funds waive the up-front sales charges associated with Class A shares for certain retirement plans and/or charitable organizations. Some of the mutual funds available on each firm’s retail platform offered such waivers and disclosed those waivers in their prospectuses.


Notwithstanding the availability of the waivers, each of the cited firms apparently failed to apply the waivers to mutual fund purchases made by eligible customers. Instead, they sold their customers – all retirement plans or charitable organizations - 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. These sales disadvantaged eligible customers by causing them to pay higher fees than they were actually required to pay.


FINRA cited each of the firms for the following deficiencies:


  • failed to establish and maintain a supervisory system and procedures reasonably designed to ensure that eligible customers who purchased mutual fund shares received the benefit of applicable sales charge waivers.
  • relied on its financial advisors to determine the applicability of sales charge waivers, but failed to maintain adequate written procedures or policies to assist financial advisors in making this determination.
  • failed to adequately notify and train its financial advisors regarding the availability of mutual fund sales charge waivers for eligible customers.
  • failed to adopt adequate controls to detect instances in which they did not provide sales charge waivers to eligible customers in connection with their mutual fund purchases.


FINANCIALISH TAKE AWAYS.    The above 12 cases were either part of, or in large part gave rise to, a May 2016 FINRA “Sweep” or targeted examination into broker-dealer sales of mutual funds to customers that are retirement plans and charitable organizations. FINRA's “Mutual Fund Waiver Sweep” was said to cover transactions from January 2011 through December 2015. Nine of the above cases - those reported in June, July and October - covered transactions over an 8-year period - from 2009 to 2017.  


FINRA will likely report more sanctions against broker-dealers for their failure to provide mutual fund waivers. And these cases will emanate from the actual 2016 sweep.