Finra has censured and slapped RBC Capital Markets with a $75,000 fine after finding the firm failed to provide mutual fund sales charge waivers and fee rebates to eligible clients.
The issue arose from deficiencies in the firm's supervisory system, which failed to offer rights of reinstatement benefits to over 1,450 accounts, resulting in clients paying $264,939 in unnecessary sales charges and fees.
Rights of reinstatement allow mutual fund investors to repurchase shares within a set period after selling them, without incurring front-end sales charges, or to recover all or part of a contingent deferred sales charge.
“The right of reinstatement benefit is available only if the reinvestment occurs within a designated period between the sale and the repurchase, which varies depending on the fund,” Finra said in its order, noting that periods of eligibility vary from 30 days up to two years in some cases.
However, from January 2016 to at least December 2023, RBC's system was not adequately designed to apply these benefits to eligible transactions, according to Finra.
"The firm’s oversight of discounts available through rights of reinstatement relied on an automated alert that was set to identify transactions in which a customer liquidates a position in a fund family and then purchases back into the same family at a later date," Finra said in its order.
The system's alert parameters were set to identify only transactions with a principal amount exceeding $1,000 and reinstatement windows of 100 days or less. This meant that many eligible transactions were not detected by the alert system.
According to Finra, about 80 percent of the missed rights of reinstatement benefits between January 2016 and December 2021 involved transactions that either had a principal amount under $1,000 or had a reinstatement window longer than 100 days.
Beyond that, Finra said RBC sometimes did not adequately review alerts that were triggered, resulting in a failure to ensure that eligible customers received their reinstatement benefits.
These supervisory shortcomings led to violations of Finra’s Rules 3110 and 2010, according to the regulator.
Robert W. Baird also ran afoul of Finra’s rules over a failure to honor rights of reinstatement in November last year. That deficiency, which occurred over a six-year period from 2015 to 2021, impacted more than 2,300 customer accounts, resulting in Baird having to pay clients almost $520,000 in restitution.
In 2022, Finra ordered Morgan Stanley to pay a roughly $800,000 penalty over a similar failure to catch excess sales charges and fees from mutual fund transactions, which similarly occurred between 2015 and 2021.
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