Questar Capital Corp., a brokerage firm headquartered in Minneapolis, Minnesota, has been censured by Financial Industry Regulatory Authority (FINRA) based upon the firm’s consent to findings that it disadvantaged charitable organization and retirement account customers by overcharging them on mutual fund transactions. Letter of Acceptance, Waiver and Consent, No. 2016049977801 (Nov. 2, 2017).
According to the AWC, from July 1, 2009 to November 1, 2016, Questar sold customers mutual funds containing higher expenses than customers should have paid. The firm reportedly failed to apply sales charges waivers in 2,472 instances since July 1, 2009. Consequently, the AWC stated that customers were excessively charged a total of $686,334.00 by the firm.
Particularly, the firm reportedly sold mutual funds containing several share classes, where each share class represented the same securities portfolio but contained differences in the funds’ composition as well as the fees charged to investors. The AWC stated that class A shares carried front-end loads, whereas class B and C shares did not but contained higher service and distribution fees.
The AWC indicated that the firm’s class A shares contained up-front sales charges that could be waived in certain cases, and if waived, it would increase the investors’ returns all else equal. The AWC stated that considering the waivers of class A sales charges, investors would not benefit from purchasing class B shares or C shares, as the Class B or C shares would contain higher fees and a possible contingent deferred sales charge.
Evidently, Questar neglected to apply waivers on purchases of mutual funds made by customers who were eligible. Apparently, those customers were sold class A shares containing the up-front sales load, otherwise class B or C shares containing the higher distribution fees, expenses, and back-end sales charges. FINRA concluded that the firm failed to detect and properly apply waivers, resulting in an overpayment by customers.
FINRA also found that the firm failed to adequately supervise mutual fund sales charge waiver applicability. Specifically, financial advisors were relied upon by the firm to make waiver determinations. However, the firm did not set forth reasonable procedures or policies to help the advisors determine when waivers applied. Evidently, the advisors were not even notified or trained to determine when waivers were available.
Moreover, no written supervisory procedures were created or implemented through the firm to detect when the fund’s prospectuses stated that sales charges waivers were available. The firm also failed to determine when sales charges waivers had not been provided for customers that were eligible for them. Therefore, FINRA found the firm’s supervisory failures violative of FINRA Rules 2010, 3110 and NASD Conduct Rule 3010.
Financial Industry Regulatory Authority (FINRA) Public Disclosure reveals that the firm has been identified in eight regulatory infractions as well as a customer initiated investment related arbitration claim referencing allegations of the firm’s wrongdoing.
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