Kestra Investment Services LLC a brokerage firm headquartered in Austin Texas has been censured and fined $225,000.00 by Financial Industry Regulatory Authority (FINRA) founded on allegations that the firm overcharged customers on mutual fund purchases. Letter of Acceptance Waiver and Consent No. 2016048404601 (Feb. 13, 2019).
According to the AWC, from July 1, 2009 to February 22, 2018, the firm sold a number of mutual fund share classes which represented interests in the same securities portfolio but contained differences with respect to the amount and structure of sales charges and asset-based fees shareholders paid. The AWC stated that customers’ returns were also impacted by, another other things, fees and breakpoint discounts. FINRA indicated that in the event the customer qualified for a waiver of a sales charge, it did not make any sense for the customer to be invested in any other share class with higher annual expenses or sales loads.
Evidently, the firm offered mutual funds that contained sales charge waivers for charitable organizations and retirement plans. However, the firm neglected to apply those waivers on purchases made by eligible customers. To the contrary, customers were sold Class B or Class C shares that contained higher expenses and fees. FINRA stated that the firm disadvantaged those customers by charging them more than what the customers were supposed to have charged.
The AWC stated that throughout the 2009 and 2018 timeframe, the firm failed to adequately supervise the determinations of share classes and the application of sales charge waivers. Evidently, financial advisors were relied upon by Kestra Investment Services to make determinations about sales charge waiver applicability. However, the firm lacked any procedures or policies to aid the advisors in determining the applicability of the sales charge waivers for customers in circumstances where customers were eligible.
Evidently, it was only after FINRA examined the firm that it commenced a review of its mutual fund transactions to identify if sales charge waivers had not been applied. Following its investigation, the firm revealed that since July 1, 2009, there were 3,205 customer accounts containing purchases of mutual funds without any sale charge waiver being applied. The AWC noted that Kestra Investment Services’ failure to apply the waivers from July 1, 2009 and February 22, 2018 led the firm to overcharge customers by a total of $1,648,984.00.
Further, the AWC stated that financial advisors did not receive any notification and training concerning the availability of the sales charge waivers until late in 2015 – by that time customers had already been overcharged. Moreover, the firm reportedly failed to create any supervisory controls to determine when the firm failed to provide eligible customers with the waivers. As a result, FINRA found that the firm’s failure to supervise its mutual fund sales charge waiver process was conduct violative of FINRA Rules 2010, 3110(a) 3110(b) and NASD Conduct Rule 3010(a) and 3010(b).
This is not the first time that Kestra Investment Services has been censured for its deficient supervision and other conduct violative of FINRA Rules. Specifically, the firm was censured and fined $475,000.00 by FINRA based upon the firm’s consent to findings that it neglected to supervise brokers’ recommendations and sales of variable annuities. Letter of Acceptance Waiver and Consent No. 2014039418401 (Nov. 1, 2016). Apparently, $52,000,000.00 worth of L-share variable annuity contracts had been recommended and sold to customers by brokers of the firm without the firm properly supervising those transactions for suitability. FINRA stated that the firm failed to train its registered representatives and principals, and deprived representatives with the tools to provide prospective investors with comparisons of surrender penalties and fees on L share contracts with the penalties and fees of other annuities the customers could consider. FINRA found the firm’s conduct violative of FINRA Rules 2010, 2330 and NASD Rule 3010.
