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FYI: Mutual Fund Waiver Initiative Results Announced by FINRA

FYI: FINRA announced (press release: http://www.finra.org/newsroom/2019/finra-announces-final-results-mutual-fund-waiver-initiative) that it has settled with 56 broker-dealer firms in its Mutual Fund Waiver Initiative, obtaining a total of $89 million in restitution for nearly 110,000 charitable and retirement accounts.

The Mutual Fund Waiver Initiative was a multi-year initiative started in 2015 with settlements with firms that self-reported failures to consider applicable mutual fund share class sales charge waivers for charitable and retirement plan accounts. This was followed by additional self-reported failures, which led FINRA to launch a sweep exam looking at this area. In the end, FINRA sanctioned 56 firms for failing to waive mutual fund sales charges for eligible charitable organizations and retirement accounts, and failing to reasonably supervise the area. Of the 56 firms sanctioned, 43 were granted extraordinary cooperation and not fined. The remaining 13 firms were fined a total of $1.32 million.

FINRA’s Mutual Fund Waiver Initiative is separate from FINRA’s 529 Plan Share Class Initiative announced in January 2019. (For more on FINRA’s 529 Plan Initiative, see my prior ‘FYI’ posting dated January 29, 2019.) While both initiatives focus on supervisory systems in place at firms to oversee sales of mutual funds, the central concern in the Mutual Fund Waiver Initiative is whether appropriate sales charge waivers are being provided to charitable and retirement plan accounts. In contrast, the central concern under the FINRA’s 529 Plan Initiative is whether firms’ share class recommendations are suitable for customers’ 529 plans and tailored to the unique circumstances and needs of each customer. The results of FINRA’s 529 Plan Initiative have not been announced yet.

Both of the FINRA initiatives are separate from the SEC’s own Share Class Selection Disclosure (SCSD) Initiative, which focused on investment advisers’ undisclosed conflicts of interest in the selection or recommendation of mutual fund share classes that paid the advisers, their broker-dealer affiliates and/or their reps a 12b-1 fee, when less expensive share classes were available. The SEC’s initiative resulted in settlements with 79 firms that self-reported. (For more on those settlements, see my prior ‘FYI’ posting dated March 11, 2019.) At this stage, industry is concerned about what may be the SEC’s next steps in this arena, perhaps focusing on adviser disclosures relating to payments OTHER THAN 12b-1 fees that result from investments in mutual funds. In the meantime, the SEC continues to be criticized for the SCSD Initiative as tantamount to ‘rulemaking by enforcement.’ See, for example, the letter submitted to the SEC from ASA (http://americansecurities.org/wp-content/uploads/ASA-Letter-to-SEC-Regarding-Rulemaking-by-Enforcement-FINAL.pdf) and my May 11, 2019 ‘FYI’ post regarding Commissioner Peirce’s remarks about the initiative.

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