Principal Securities, Inc., a broker-dealer headquartered in Des Moines, Iowa, was censured by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm excessively charged its customers through mutual funds transactions, and failed to implement adequately supervisory procedures and protocols to make sure that eligible mutual funds customers received sales charge waivers. Letter of Acceptance, Waiver and Consent, No. 2015048330401 (Nov. 15, 2016).
According to the AWC, from July 1, 2009 to September 1, 2016, Principal Securities had excessively charged certain charitable organization and retirement plan customers as a result of not properly applying sales charge waivers associated with mutual fund class A shares. Apparently, the customers who qualified for such waivers of sales charge waivers were not supposed to pay an upfront load associated with purchases, but were charged such upfront loads.
Additionally, customers who qualified for class A sales charge waivers reportedly lacked any basis to purchase other mutual fund share classes, given the higher expenses and sales loads associated with them. Yet, customers eligible for Class A share waivers were purportedly sold other share classes with higher expenses and fees.
The AWC reported that applications of the sales charge waivers pertaining to mutual funds were not properly supervised by Principal Securities. Specifically, the firm reportedly depended on financial advisors to identify when such waivers would be applicable; however, the firm did not set forth a legitimate process to help financial advisors make determinations regarding sales charge waivers. The AWC revealed that the firm also failed to create and implement written protocols for registered representatives to detect sales charge waiver applicability within the firm’s mutual funds prospectuses.
The AWC revealed that approximately nine hundred customers bought mutual funds through Principal Securities, in which sales charge waivers failed to be applied in the correct manner. As a result, the firm reportedly overcharged customers by nearly $900,000.00. By entering into the AWC, Principal agreed to provide approximately $1,035,000.00 in restitution to affected customers. Ultimately, FINRA found that Principal’s conduct was violative of FINRA Rule 2010, 3110 as well as NASD Conduct Rule 3010.
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