The Financial Industry Regulatory Authority (FINRA) is conducting targeted exams of firms’ systems and procedures as it relates to providing mutual fund discounts or fee waivers to clients. The targeted exam letter was sent to small number of broker-dealer firms that were identified through a risk-based analysis, according to FINRA.
This targeted exam comes months after Merrill Lynch agreed to pay more than $7.2M in restitution and interest payments to settle allegations it had charged customers unnecessary mutual fund fees. According to FINRA, Merrill Lynch’s supervisory procedures led the wirehouse to overcharge more than 13,000 accounts’ mutual fund transaction fees when they were entitled to waivers and fee rebates offered by fund companies.
These clients were entitled to ‘rights of reinstatement’ discounts, which includes cases where exchanges are made among shares of funds in the same fund family. Merrill Lynch had allegedly relied on its staff to ‘manually identify’ the waivers and, as a result, missed out many customers eligible for the discounts. In total, it is estimated the wirehouse’s error led to over $6M in excess fees and charges between 2011 and 2017.
The letter asks firms to identify whether it has systems and procedures in place reasonably designed to provide eligible mutual fund customers with RoR sales charge waivers and/or fee rebates, and to describe all such systems and procedures in effect, with respect to the period January 1, 2017 through June 30, 2020 (the relevant period).
Select broker-dealers are being asked to:
1.) Identify whether the firm has systems and procedures in place reasonably designed to provide eligible mutual fund customers with RoR sales charge waivers and/or fee rebates.
2.) Describe all such systems and procedures in effect during the relevant period. Include in this response: (a) all documents relating to the systems and procedures (e.g., written supervisory procedures, policy manuals, job aids, training materials, technical specification/requirements documents for any automated controls, and quality control testing and audit results for any controls); and (b) the time period when the systems and procedures were in effect.
3.) If there were any changes to the firm’s systems and procedures relating to RoRs during the relevant period, indicate when each change in policy occurred and the reason(s) for the change.
4.) If the firm has implemented, or is otherwise in the processes of implementing, a policy standardizing the timeframe governing when RoRs apply to purchases of mutual funds offered on its platform, provide the details of the policy and a statement discussing the reason for implementing the policy.
5.) Identify whether the firm detected any RoR sales charge waivers or fee rebates (missed RoR waivers) that were not provided to customers purchasing mutual funds and provide details of any missed waivers or fees, including the number of customers and the number, and dollar value, of the missed waivers or fees.