Finra finds Commonwealth Financial overcharged these investors

Broker-dealer returns to investors the nearly $900,000 it gained by placing clients in higher-cost funds

Nov 12, 2018 @ 2:43 pm

By Jeff Benjamin

Commonwealth Financial Network becomes the latest firm caught up in Finra's focus on overcharging retirement plan investors via mutual fund share classes.

The Financial Industry Regulatory Authority Inc. found that over eight years through July 2017, Commonwealth was responsible for overcharging mutual fund investors by $766,295.

Commonwealth, which was recognized by Finra for cooperating and for conducting its own internal review of mutual fund overcharging in 2015, has paid $888,337 in restitution to eligible customers.

According to Finra, Commonwealth "disadvantaged certain retirement plan and charitable organization customers" who were eligible to purchase class A share mutual funds without front-end sales loads.

(More:Increase of enforcement cases against RIAs, advisers suggests compliance may need a boost)

Instead, the eligible investors were sold funds with loads or with higher ongoing fees and expenses.

Class A shares, for example, typically include a front-end sales charge when purchased, in addition to annual distribution and service fees of around 25 basis points. Most of that front-end load is paid to the broker-dealer.

However, many fund companies offer investors waivers of the initial sales charge.

Securities lawyer Adam Gana described the practice of not placing clients in the lowest-cost mutual funds available as a way of "nickel-and-diming customers to death."

"It adds up to a huge boon for the industry, but it's outside the scope of most investors because they usually don't even know it's happening," he said. "There's no magical understanding on the part of investors regarding whether there should be sales loads or not."

(More:SEC tests show investors don't understand disclosure form for brokers, advisers)

Commonwealth's chief compliance officer, Paul Tolley, said the firm is pleased to have resolved this matter and appreciates Finra's recognition of Commonwealth's cooperation.

"Upon discovering the issue, we took immediate corrective action, initiating our own investigation and paying restitution to clients prior to Finra's intervention," Mr. Tolley said in an emailed response.

Commonwealth's restitution follows similar action by Lincoln Investment Planning, which agreed in September to pay $1.37 million to clients who were overcharged between January 2011 and this past June.

The Securities and Exchange Commission drew attention to the issue in February when it offered to waive fines against investment advisers who came forward to admit they had been overcharging clients by placing them in higher-cost funds.

Last December, Finra's 2017 summary of exam finding included an emphasis on brokers pushing high-fee share classes without checking for more suitable options.

Andrew Stoltmann, president of the Public Investors Arbitration Bar Association, expects more of these kinds of cases, "because it's like shooting fish in a barrel for Finra."

"It's embarrassing for Commonwealth to get caught with its hand in the cookie jar, but in this sort of rising market environment, I would expect regulators to find more cases like this," he added. "The overcharging cases, which are clear violations of securities laws, are ubiquitous practices that Finra can find really easily."


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