Royal Alliance Securities, a brokerage firm headquartered in Jersey City, New Jersey, has been censured and fined $150,000.00 by Financial Industry Regulatory Authority (FINRA) based upon accusations that the firm failed to appropriately apply sales charge discounts for customers when the customers were eligible to receive them, overcharging them as a result. Letter of Acceptance, Waiver and Consent, No. 2016049977701 (Dec. 20, 2017).
According to the AWC, multiple share classes of securities had been sold by the firm, including class A, B, C, and R shares. Those share classes depicted interests in an identical securities portfolio, however, they contained differences relating to sales charges and structure, as well as the asset-based charges that were assessed to customers. Sales charges waivers were reportedly applicable on class A shares depending on the circumstances, and if applied, affected the returns that customers were able to generate.
The AWC stated that in circumstances where a sales charge waiver was available for a class A share purchase, the customer would not incur sales loads on the front-end that typically would be assessed on class A shares. As a result, the application of a sales charge waiver would eliminate the rationale for an investor to make purchases of other share classes containing higher sales loads or annual fees, such as class B and C shares.
The AWC stated that several funds made available by the firm to charitable organizations and retirement plans contained sales charge waivers, where those waivers were disclosed in the funds’ prospectuses. Yet, those waivers did not get applied to purchases of mutual funds effected by customers that were eligible, in which customers were sold class B and C shares containing higher expenses and fees or had been class A shares containing an upfront sales load. Consequently, FINRA found that customers were put at a disadvantage and paid more than what was required of them.
The AWC revealed that the firm’s supervision of sales charge waivers was inadequate. Financial advisors were tasked by the firm with making determinations of waivers to apply; however, the firm neglected to implement reasonable procedures and policies to assist those advisors make determinations. The firm reportedly failed to create and implement procedures to detect when sales charge waivers outlined in fund prospectuses were applicable for customers that were eligible.
Moreover, financial advisors were evidently not trained or even notified with respect to the sales charge waivers having been available for customers that were eligible. The firm additionally failed to undertake procedures to identify when waivers did not get applied as they should. FINRA concluded that the firm’s supervisory failures in that regard were violative of FINRA Rules 2010, 3110 and NASD Conduct Rule 3010.
The firm apparently determined that between January 1, 2011 and September 30, 2017, about two-hundred twenty-one customer accounts reflected mutual fund purchases that failed to have sales charged waivers applied. Customers were collectively excessively charged by $458,830.00.
This is not the first time that the firm has been sanctioned by FINRA for failing to provide customers with discounts when the customers were eligible. Specifically, the firm was censured fined $225,000.00 by FINRA for several reasons, including: failing to create and implement a supervision system and written supervisory procedures for purposes of ensuring that customers purchasing unit investment trust units received sales charge discounts when customers were eligible; failing to create and implement supervision systems to ensure that unit investment trust prospectuses were delivered; and failing to adequately supervise the activities of its staff. Letter of Acceptance, Waiver and Consent, No. 2012034450501 (Nov. 2015). FINRA found that the firm’s conduct was violative of NASD Conduct Rule 3010.
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