FINRA Settles with Five Firms over Improper Fund Sales

FINRA (the Financial Industry Regulatory Authority) announced it has settled cases against five firms for improper mutual fund sales and supervisory violations.

The violations include improper sales of Class B and Class C mutual fund shares and failure to have supervisory systems designed to provide all eligible investors with the opportunity to purchase Class A mutual fund shares at net asset value (NAV) through NAV transfer programs, a FINRA statement said.

For the share class sales violations, FINRA imposed an $800,000 fine against Prudential Securities and a $750,000 fine against UBS Financial Services, Inc. A $100,000 fine was imposed against Pruco Securities for improper sales of Class B shares. The firms also agreed to remediation plans that will address over 27,000 fund transactions in the accounts of 5,300 households, FINRA said.

To resolve the NAV violations, Merrill Lynch, Prudential Securities, UBS, and Wells Fargo agreed to remediation plans – estimated to exceed $20 million – for eligible customers who qualified for but did not receive the benefit of NAV transfer programs. In addition, FINRA fined Prudential Securities, UBS, and Merrill Lynch $250,000 each for failure to have reasonable supervisory systems and procedures to identify and provide opportunities for investors to obtain sales charge waivers through NAV transfer programs.

According to the announcement, from 2001 through 2004, many mutual fund families offered NAV transfer programs that eliminated front-end mutual fund sales charges for certain customers. Customers who redeemed fund shares for which they had paid a sales charge were permitted to use the proceeds to purchase Class A shares of a new mutual fund at NAV without paying another sales charge. However, FINRA found that, as a result of inadequate supervisory systems at Merrill Lynch, Wells Fargo, and UBS from 2002 through 2004, and at Prudential Securities from 2002 to 2003, certain customers eligible for the NAV programs incurred front-end sales loads that they should not have paid, or purchased other share classes that unnecessarily subjected them to higher fees and the potential of contingent deferred sales charges.

FINRA noted that it did not impose a fine on Wells Fargo Investments because of the firm’s proactive remedial actions taken upon its discovery of the improper actions before FINRA’s inquiry. When Wells Fargo discovered it had failed to provide certain eligible customers with NAV pricing, it initiated a review of its mutual fund sales and acted promptly and in good faith to repay customers and correct its system and procedures – paying more than $612,000 in restitution to investors in Class A shares.

Each firm settled these matters without admitting or denying the allegations, but consented to the entry of FINRA’s findings.