Finra reaches settlements with 56 firms for overcharging customers on mutual funds

Regulator obtained $89 million in restitution as a result of the crackdown

Jul 17, 2019 @ 2:17 pm

By Mark Schoeff Jr.

Finra reached settlements with 56 brokerages and obtained $89 million in customer restitution as the result of a crackdown on firms overcharging for mutual funds, the agency announced Wednesday.

The Financial Industry Regulatory Authority Inc. alleged the firms failed to give sales charge waivers to nearly 110,000 charitable and retirement accounts when they sold Class A shares that offered the price breaks.

The mutual fund waiver initiative began in 2015, when Finra reached settlements with 10 firms that self-reported. The organization continued to find problems with waivers and launched a targeted exam in May 2016 that wound up hitting 11 firms with sanctions. Another 35 firms self-reported and reached settlements before the sweep began.

Of the 56 firms involved in the waiver probe, 43 were not fined because Finra gave them credit for extraordinary cooperation. The other 13 were fined a total of $1.32 million. All of the firms paid restitution to clients.

The initiative concluded Tuesday with the announcement of the final two settlements.

Western International Securities Inc. agreed to pay $375,000 in restitution and a penalty of $75,000 for mutual fund sales that occurred between 2011 and 2017. Park Avenue Securities agreed to pay $640,522 in restitution for sales that occurred between 2011 and 2018.

Park Avenue Securities avoided a fine because it initiated its own investigation before Finra stepped in and promptly took action to address customer harm and stop the violative conduct, according to the agreement.

Neither firm admitted or denied Finra's findings.

Firms should not put fund prospectuses on the shelf without fully grasping their compensation details, said Julie Riewe, partner at Debevoise & Plimpton.

"The regulators are telling advisers and brokers to read prospectuses regularly and understand them," said Ms. Riewe, former co-chief of the Securities and Exchange Commission Enforcement Division's Asset Management Unit. "They also suggest that this review occur through a centralized function and supervision rather than being left to individual reps to figure out."

The SEC and Finra have both zeroed in on potential customer harm from high-fee mutual funds.

Earlier this year, the SEC concluded the first round of its share-class initiative, with another tranche of settlements expected. In January, Finra launched a self-reporting program centered on 529 college savings plan costs.

Those efforts highlight the regulators' emphasis on retail customers and clients, according to Ms. Riewe.

"They're very focused on point-of-sale fees and expenses," she said.

Last week, Finra issued guidance on how it determines whether firms can reduce enforcement penalties by cooperating with the regulator. It followed up on that theme Wednesday.

"Ensuring that harmed customers are made whole is our highest priority, and in some instances Finra granted credit for extraordinary cooperation to those firms who were proactive in identifying and fixing the issue and who quickly remediated affected customers," Susan Schroeder, Finra executive vice president and head of enforcement, said in a statement.

The chance to avoid fines will get firms' attention, Ms. Riewe said.

"By offering a concrete measure of credit, regulators force firms to consider seriously whether to self-report to take advantage of that carrot," she said.

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