FINRA (Financial Industry Regulatory Authority) announced on June 2, 2022 that it ordered Merrill Lynch, Pierce, Fenner & Smith, Inc., to pay 15.2 million in restitution and interest to thousands of customers who purchased Class C mutual fund shares when Class A shares were available at a substantially lower cost. FINRA news releases are useful tools to look for trends in violations and other sanctions. These trends can assist you in identifying weak areas in your Firm’s compliance programs or surveillance. Below is a summary of the Merrill order, as well as key takeaways. Click here for the corresponding news Read more about Merrill Mutual Fund Enforcement Lessons Learned[…]
FINRA has recently given us all a new and improved Fund Analyzer tool. With the recent emphasis on Share Class selection, Regulation Best Interest (Reg BI) for broker-dealers, and the fiduciary duty of Registered Investment Advisers. Firms are encouraged to train their staff on using this new tool.
The new analyzer allows individuals to sort through and compare more than 30,000 products and run a wide variety of investment scenarios. The tool’s enhancements enable users to better calculate how a fund’s fees, expenses, and discounts impact the value of a fund over time.
The Securities and Exchange Commission adopted a new rule under the Securities Exchange Act of 1934 that established a standard of conduct for broker-dealers and the natural persons who are associated persons of a broker-dealer. It was established to enhance the broker-dealer’s standard of conduct to retail customers beyond the existing suitability obligation.
This standard of conduct takes critical principles from the underlying fiduciary obligations under the Investment Advisers Act of 1940. The SEC’s focus was regardless of whether a retail investor chooses a broker-dealer or an investment adviser, all retail investors should be entitled to a recommendation (by a broker-dealer) or advice (by an investment adviser) given in the best interest of the retail investor. It is essential to recognize that the term “retail investor” also includes Accredited Investors.
Advisers have a fiduciary obligation to recommend a share class that will provide their clients with the lowest overall expenses, based on anticipated transaction costs and holding periods. Moreover, if the Firm recommends mutual funds that carry 12b-1 fees when lower share class options exist, the Firm must make full and fair disclosure, including conflicts associated with making investment decisions in light of the receipt of 12b-1 fees; and selecting the more expensive 12b-1 fee paying share class when a lower-cost share class is available for the same fund. Share class selection is a regulatory priority. The SEC has indicated that examiners will conduct focused, risk-based examinations to assess whether investment advisers are meeting their obligations to
- Seek best execution;
- Disclose material conflicts of interest; and
- Maintain an effective compliance program.
Investment adviser should determine its approach for meeting these three obligations and train its personnel to comply with any policies, procedures, and guidelines governing share class selection.
As the baby boomer generation reaches retirement age, regulators have increased their focus on protecting senior investors. A new study released by the FINRA Investor Education Foundation (FINRA Foundation), in collaboration with researchers from Duke University and Rush University Medical Center suggests that overconfidence in financial knowledge may lead to excessive risk taking among older investors. This is a good time for your firm to sit down and review your accounts held by elderly clients and determine if their portfolio and investment strategy actually fits their needs.
FINRA Rule 3310 provides broker-dealer guidance on how to design, test, and enforce a firm’s Anti-Money Laundering Program (“AML”). One main element of AML is to “establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under 31 U.S.C. 5318(g) and the implementing regulations thereunder.” FINRA Notice to Members 19-10 identified a key list of red flags that may be used to help identify suspicious activity in trading, money movements, insurance, and securities.