Sales Charge Discounts and Waivers Attracts FINRA's Attention

February 19, 2016

In the last two Annual Regulatory and Examination Priorities Letters, the Financial Industry Regulatory Authority (“FINRA”) has highlighted sales charge discounts and waivers as a concern. FINRA believes that certain firms have failed to provide customers with the discounted fees that would be available for the following products:

  • Mutual funds
  • Unit investment trusts (“UITs”)
  • Non-traded real estate investment trusts (“REITs”)
  • Business development companies (“BDCs”)

Based on this focus, FINRA has taken many actions in the last couple of years, including:

  • In June 2014, FINRA announced an $8 million fine levied on a major wire house firm for failing to waive sales charges for mutual fund transactions in certain retirement and charitable accounts. FINRA also ordered the firm to pay more than $24 million in restitution to affected customers, in addition to $64.8 million the firm had already repaid to disadvantaged investors.
  • In 2015, 10 firms agreed to reimburse customers approximately $30 million for failing to identify and apply mutual fund sales charge waivers available for certain retirement accounts and charitable organizations. Notably, FINRA did not levy any regulatory fines against the firms, possibly because the firms self-reported the violations. However, ACA understands that the self-reporting “grace period” might be over. FINRA appears to have renewed its efforts to fine firms for missing fee waivers on mutual funds.
  • Also in 2015, broker-dealers that failed to provide available sales charge discounts to customers who purchased UITs, REITs, and BDCs had less luck avoiding fines than those that self-reported the mutual fund fee waiver failures. Such firms were each fined $30,000 or more, a trend that may continue in 2016.

A number of products have provisions to waive their upfront sales charges or provide discounts on fees. Unfortunately, many broker-dealers have not implemented controls to identify transactions that are eligible for the fee waiver or discount. Relying upon the registered representative to make the determination as to whether a transaction is eligible for a fee waiver or discount seems to be the current industry practice.

The ongoing fines by FINRA underscore the need for firms to ensure that customers receive the discounts and waivers to which they are entitled. Firms need to inventory the available discounts for their products. They also need to confirm that there are controls in place to provide the discounts, and that they are monitoring to confirm the controls are working.

Firms should conduct an analysis of their practices and procedures to identify weaknesses in the controls that have been established. Once these weaknesses are identified, it is recommended that firms develop an action plan to remediate any gaps that were discovered. ACA can assist firms in performing a gap analysis and also help create an action plan to address any weakness that are discovered.

For more information please contact your ACA consultant or Dee Stafford at (310) 322-8840, or via email at dstafford@acacompliancegroup.com.

You are also invited to listen to our free Fee Waiver Webcast that was delivered in 2015 to assist firms in understanding the requirements around mutual fund fee waivers.