According to a public letter of acceptance, waiver and consent, Voya Financial Advisors has accepted a FINRA censure relating to failures in its distribution of certain share classes of investment products to investors who, according to Voya’s policies, should have had access to cheaper share classes.

Technically, Voya “accepts and consents, without admitting or denying the findings, and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of FINRA, or to which FINRA is a party, prior to a hearing and without an adjudication of any issue of law or fact, to the entry of the following findings by FINRA.” These findings are that, between January 1, 2009, and May 26, 2016, Voya “disadvantaged” 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. These eligible customers were instead sold Class A shares with a front-end sales charge or Class B or C shares with back-end sales charges and higher ongoing fees and expenses.

According to the FINRA censure document, during this period, Voya failed to establish and maintain a supervisory system and procedures reasonably designed to ensure that eligible customers who purchased mutual fund shares received the benefit of applicable sales charge waivers. As a result, Voya violated NASD Conduct Rule 3010 (for misconduct before December 1, 2014), FINRA Rule 3110 (for misconduct on or after December 1, 2014), and FINRA Rule 2010.

As the document explains, the different sales charges, breakpoints, waivers and fees associated with different share classes affect mutual fund investors’ returns. If an investor qualifies for a Class A sales charge waiver and purchases Class A shares, the investor will not pay a front-end sales load. In contrast, a purchase of Class B or C shares of the same fund will be subject to higher ongoing fees, as well as potential application of a contingent deferred sales charge. Therefore, if an investor qualifies for a Class A sales charge waiver, there would be no reason for the investor to purchase any other class of shares that has a sales load and/or higher annual expenses.

“Many mutual funds waive the up-front sales charges associated with Class A shares for certain retirement plans and/or charitable organizations,” the censure document states. “Some of the mutual funds available on the firm’s retail platform during the relevant period offered such waivers and disclosed those waivers in their prospectuses. Notwithstanding the availability of the waivers, Voya failed to apply the waivers to mutual fund purchases made by eligible customers and instead sold them Class A shares with a front-end sales charge or Class B or C shares with back-end sales charges and higher ongoing fees and expenses. These sales disadvantaged eligible customers by causing such customers to pay higher fees than they were actually required to pay.”

The importance of regular top-down reviews

FINRA points out that Voya relied on its financial advisers to determine the applicability of sales charge waivers, but failed to maintain adequate written policies or procedures to assist financial advisers in making this determination.

“For instance, Voya failed to establish and maintain reasonable written procedures to identify applicable sales charge waivers in fund prospectuses for eligible customers,” the censure document explains. “In addition, Voya failed to adequately notify and train its financial advisers regarding the availability of mutual fund sales charge waivers for eligible customers. Finally, Voya failed to adopt adequate controls to detect instances in which the firm did not provide sales charge waivers to eligible customers in connection with their mutual fund purchases.”

Important to the determination of the outcome of this censure, in November 2015, Voya began an internally prompted review to determine whether the firm provided available sales charge waivers to eligible customers. Based on this review, on May 26, 2016, Voya self-reported to FINRA that eligible customers had not received available sales charge waivers. At that juncture, FINRA staff requested Voya review the applicable sales in a five-year look back to January 1, 2011. Voya voluntarily expanded the five-year look back an additional two years and reviewed all applicable transactions since January 1, 2009. Voya estimates that, since January 1, 2009, approximately 143 customer accounts purchased mutual fund shares for which an available sales charge waiver was not applied.

“As a result of the failure of Voya to apply available sales charge waivers, the firm estimates that eligible customers were overcharged by approximately $104,044 for mutual fund purchases made since January 1, 2009,” the censure document says. “As part of this settlement, Voya agrees to pay restitution to eligible customers on the terms specified below, which is estimated to total $125,982 (i.e., the amount eligible customers were overcharged, inclusive of interest). Of the $125,982 in restitution being returned to customers, approximately $56,065 resulted from Voya’s voluntary expanded look back to January 1, 2009.”

According to FINRA, Voya has represented the firm will also ensure that retirement and charitable waivers are appropriately applied to all future transactions.