Stephens, Inc., located in Little Rock, Arkansas, was censured by Financial Industry Regulatory Authority (FINRA) for disadvantaging certain retirement plan and charitable organization customers that were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge; and for failing to establish and maintain a supervisory system and procedures reasonably designed to ensure eligible customers who purchased mutual fund shares received the benefit of applicable sales charge waivers. Letter of Acceptance, Waiver and Consent, No. 2015046029901 (Oct. 27, 2015).
According to the AWC, Stephens, Inc. sells mutual funds that have different classes of shares which represent interests in the same portfolio of securities, but differs in structure and amount of sales charges paid by shareholders and asset based fees assessed on each shareholder’s investment.
Class A shares typically have front end charges when purchased, have annual expenses, and distribution and services fees. Typically, the front-end charge goes to the broker-dealer as a concession. The investors that purchase Class A shares are commonly offered a waiver of initial sales charges under specific circumstances. Unlike Class A shares, Class B and C shares do not carry a front-end sales charge, but carry a higher distribution and service fee charge and may also be subject to a contingent deferred sales charge. Class R shares, offered via mutual funds in retirement plans, often do not have front-end sales charges but have fees which tend to exceed Class A shares.
Different sales charges, breakpoints, waivers and fees associated with the share classes affect a shareholders’ mutual fund returns. Ultimately, if an investor qualifies for a Class A sales charge waiver and proceeds to purchase the Class A shares, there will not be a font-end load. Additionally, if an investor qualifies for a Class A sales charge waiver, there is no reason to purchase the other class of shares, as other share classes would carry higher loads and expenses.
According to the AWC, despite Stephens, Inc. offering waivers of sales charges associated with Class A shares for retirement plans and charitable organizations, the firm failed to apply the waivers to the mutual fund purchases by eligible customers from at least July 1, 2009. Instead, eligible customers were either sold Class A shares with front-end sales charges or Class B or C shares containing the higher expenses and fees. As such, customers paid more than they were required to pay.
Further, the AWC indicated that since July 1, 2009, the firm failed to reasonably supervise the applicability of sales charge waivers to eligible mutual fund sales. The AWC stated that the firm relied on financial advisors in order to determine if sales charge waivers applied, but failed to maintain adequate policies to assist the advisors in making the determination.
The AWC stated that Stephens, Inc. failed to adequately notify and train financial advisors regarding availability of mutual fund sales charge waivers for eligible customers; failed to adopt adequate controls to detect instances in which advisors did not provide waivers to eligible customers in connection with purchases; and failed to establish procedures to identify sales charge waivers in fund prospectuses for eligible customers. FINRA found that Stephens’ conduct in this regard violated NASD Conduct Rule 3010, 3110, and Rule 2010.
The AWC stated that since July 1, 2009, an estimated 1,300 accounts purchased mutual fund shares for which an available sales charge waiver was not applied. Consequently, according to the failure of Stephens, Inc. to apply the sales charge waivers, the firm had estimated that eligible customers were overcharged by an estimated $150,000 for mutual fund purchases. Stephens, Inc. agreed to pay restitution to eligible customers in the amount of approximately $150,000.
FINRA, via NASD Rule 3010(a), requires that firms and supervisory personnel establish and maintain a supervisory system that is reasonably designed to achieve compliance with applicable securities laws and regulations. Additionally, Rule 3010(b) requires that firms establish, maintain and enforce written procedures to supervise their business and registered representatives that are reasonably designed to achieve compliance with applicable securities laws.
Guiliano Law Group
If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esquire, and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.