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Compliance Concepts

The FINRA Mutual Fund Sweep vs. Cultures of Mis-Compliance

February 22, 2018

By Howard Haykin


As reported yesterday in Financialish FINRA has, since April 2017, reported disciplinary actions against 21 broker-dealers for having sold mutual funds to institutional customers that were loaded with front-end sales charges when, in fact, those customers were eligible to purchase the same funds without sales charges.


What I didn’t mention was that 15 of those 21 firms are or were affiliated with one of 2 large broker-dealer groups: either Advisor Group or Cetera Financial Group. All told, the impacted customers of these firms had been cheated out of overcharged by nearly $9 million in front-end sales charges.



  1. Legend Equities Corp’n  ($2.1Mn in Restitution)
  2. Cetera Advisor Networks  ($1.7Mn)
  3. Cetera Investment Services  ($1.2Mn)
  4. First Allied Securities  ($769K)
  5. Cetera Advisors  ($553K)
  6. Cetera Financial Specialists  ($502K)
  7. Summit Brokerage Securities  ($313K)
  8. Investors Capital  ($377K)
  9. J.P. Turner & Company   ($176K)
  10. Girard Securities  ($90K)
  11. VSR Financial Services  ($40K)


Note: Financialish addressed in December 2017 the FINRA sanctions against the first wave of Cetera Financial Group firms - see FINRA ‘Mutual Fund Waiver Sweep’ – Part 2.



  1. FSC Securities Corp'n  ($381K in restitution;  $100K in fines)
  2. Royal Alliance Associates  ($459K;  $150K)
  3. SagePoint Financial  ($170K;  $75K)
  4. Woodbury Financial Services  ($114K;  $75K)


Interestingly enough, FSC Securities, Royal Alliance and SagePoint had been sanctioned for similar violations. In March 2016, these firms agreed to pay over $9.5 million in fines, disgorgement and prejudgment interest to settle SEC charges that they had placed certain advisory clients in mutual fund shares classes with higher expense costs when lower expense cost shares classes of those funds were available. 



CULTURE OF COMPLIANCE.    Lori Richards, former Director of SEC’s Office of Compliance Inspections and Examinations (OCIE), popularized the term “Culture of Compliance” in at least 2 speeches:  (i) The Culture of Compliance (2003); and, (ii) Working Towards a Culture of Compliance: Some Obstacles in the Path (2007).


In the 2007 speech at a conference hosted by the National Society of Compliance Professionals, Ms. Richards defined "Culture of Compliance," as follows:

"We at the SEC have often talked about the need to instill a strong Culture of Compliance within firms - this means establishing, from the top of the organization down, an overall environment that fosters ethical behavior and decision-making. Simply put, it means instilling in every employee an obligation to do what's right. This culture will underpin all that the firm does, and must be part of the essential ethos of the firm, so that when employees make decisions, large and small, and regardless of who's in the room when they make them, and whether or not lawyers or regulators or clients or anyone else is looking, they are guided by a culture that reinforces doing what's right. Importantly, a firm's Culture of Compliance exists outside the compliance department - it exists throughout the firm."


What appears obvious is that none of these 15 firms or their umbrella organizations (Advisor Group or Cetera Financial Services) abided by the themes or moral principals espoused by Lori Richards. If they had, and their actions had been isolated instances or aberrations, it's likely that ... (i) these firms' violative sales would not have continued for so many years, and, (ii) FINRA would have levied sanctions against more than just 6 other firms.


The big question now is: How well will FINRA monitor the actions of these firms and organizations in its efforts to protect everyday investors?