Investors Capital Corporation, J.P. Turner & Company, L.L.C., VSR Financial Services, Inc., Investacorp., Inc., and BB&T Investment Services, Inc., have all been censured by FINRA for taking advantage of certain customers, namely retirement plans and charitable organizations, by overcharging them in mutual fund transactions.
Evidently, the firms sold mutual funds containing multiple share classes, in which each share class represented interests in an identical securities portfolio but contained differences with regard to the amount and structure of the ongoing asset-based fees that each shareholder incurred as well as the sales charges shareholders has been assessed. The AWC stated that the expenses and fees as well as sales charge waivers were all detailed through mutual fund prospectuses or were contained within each mutual fund’s statement of additional information.
The AWC confirmed that the brokerage firms commonly sold class A, B, C, and R shares. Evidently, the class A shares would be purchased at the share’s net asset value with the addition of a sales charge that was to be paid to the broker-dealers as concessions. Class B and C shares reportedly contained higher service fees and distribution fees, as well as contingent deferred sales charges; however, they did not contain upfront sales charges like Class A shares. Class R shares were reportedly offered to retirement accounts without the assessment of upfront sales charges; however, their fees exceeded class A shares.
Critically, the AWC stated that investors’ returns were impacted by the fees, waivers, breakpoints and sales charges applied to each share class. The AWC confirmed that if offered waivers of sales charges on Class A shares, it did not make sense for investors to buy other shares classes containing higher annual expenses or sales loads. Charitable organizations and retirement plans have been two types of customers that the funds offered sales charge waivers on.
The AWC revealed that mutual funds that the firms offered through their retail platforms contained waivers, and identification of those waivers existed within funds’ prospectuses. Yet, the firms still neglected to apply them when customers purchasing the mutual funds had been eligible for them. Rather, the firms executed class A share purchases, in which some customers were assessed a front-end fee. Other customers bought class B shares and class C shares containing higher expenses and fees and sales charges. As a result, the customers that were eligible for waivers were overcharged.
The AWC stated that the firms failed to provide adequate supervision of the processes by which sales charge waivers applied to sales of eligible mutual funds. Apparently, the firms called upon their own financial advisors to make determinations as to whether sales charge waivers applied; however, those advisors were not provided with procedures or policies to consult on the application of the waivers. For example, the firms failed to create and implement written protocols for detecting the waiver applicability as referenced within mutual funds prospectuses.
The firms evidently neglected to inform and properly train its own advisors in regard to sales charge waiver availability in cases where customers were eligible for them. The AWCs also stated that the firms did not maintain reasonable mechanisms to identify when the waivers to sales charges had not been provided to those eligible customers. Consequently, FINRA concluded that the firms’ supervisory failures were violative of FINRA Rules 2010, 3110 and NASD Conduct Rule 3010.
Investors Capital Corporation agreed to pay $437,674.00 in restitution based upon consenting to findings that it failed to apply sales charge waivers for customers that were eligible in 241 instances between July 1, 2009 and January 18, 2017, causing the customers to be excessively charged in the amount of $376,998.00. Letter of Acceptance, Waiver and Consent, No. 2016050259601 (Dec. 7, 2017).
J.P. Turner & Company, L.L.C. consented to paying $213,137.00 in restitution by consenting to findings that it failed to apply sales charge waivers for 93 customers from July 1, 2009, to April 4, 2016, resulting in the firm’s customers having paid $176,147.00 in excess mutual fund fees. Letter of Acceptance, Waiver and Consent, No. 2016050260101 (Dec. 7, 2017).
VSR Financial Services, Inc. acquiesced to a $47,801.00 restitution payment by consenting to findings that 21 customers were overcharged between July 1, 2009 and January 9, 2017, leading customers to overpay $39,505.00. Letter of Acceptance, Waiver and Consent, No. 2016050260201 (Dec. 7, 2017).
Investacorp., Inc. agreed to pay $247,886.00 in restitution after having confirmed with FINRA that it failed to apply waivers for 465 customers from July 1, 2009 to July 5, 2016, which caused customers to overpay $215,092.00. Letter of Acceptance, Waiver and Consent, No. 2015047977401 (Dec. 6, 2017).
BB&T Investment Services, Inc. consented to paying $373,134.00 in restitution for overcharging 865 customer accounts $331,983.00 between July 1, 2009 and August 1, 2017. Letter of Acceptance, Waiver and Consent, No. 2016051183701 (Dec. 5, 2017).
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