There are two issues the broker dealers are faced with that have caused these fines and rebates to customers as outlined in the article below. Most of the fines/rebates are around B/Ds selling A shares to retirement plans and charitable accounts in which they stated in their prospectus that they would waive those fees. Most A shares have a large sales charge when they buy the shares, typically 5% of the purchase price which will decrease based on a breakpoint schedule where the fee decreases as the purchaser buys larger amounts of the fund. Most funds also allow what is called Rights of Accumulation (ROA) where a purchaser can aggregate multiple accounts that are related to them using “Linking rules”(wife, children, etc) and thus get a discount on the upfront charge because they land further up on the breakpoint schedule and thus get a reduced sales charge. The industry problem is that this is not an easily attainable data point. The best source right now is probably using the “social codes” which are in Profile which indicate which account types such as retirement plans, etc (via a social code identifier) are eligible to purchase and also if they can purchase at NAV. But there are only 22,188 active security identifiers in profile so where do you get the remainder? Also, social codes are not present in a prospectus, so funds have to enter those manually in Profile, so there is margin for error.
The other issues is selling a client the wrong share class. This has to do with share class eligibility. I think most firms now have a share class eligibility tool that in many cases restricts an FA from selling a wrong share class to a customer. It looks at a number of factors including account type to help the FA put his client in the proper share class. Apparently some have not done as good a job on this as others, but they are a lot better complying with this issue that with the above issue even though they are related.
Edward Jones reviews mutual fund fees charged to customers
NEW YORK, June 24 | By Jed Horowitz
Edward Jones, a brokerage firm that booked 77 percent of its $6.3 billion of revenue last year from mutual fund and annuity sales, is reviewing its records to see if some fund customers were eligible for fee waivers they did not receive.
Jones, the third-largest U.S. brokerage as measured by its more than 14,200 brokers, said in a regulatory filing last month that it is providing periodic updates to the Financial Industry Regulatory Authority about the review, which has not previously been reported.
Jones is not the first brokerage firm to be double checking its mutual fund fee practices as increased regulatory scrutiny looms. But as one of the few privately held partnerships still left in the securities industry, its partners’ profits could be affected if it is required to reimburse customers.
The St. Louis-based firm is focusing on fees that may have improperly been charged to certain charitable and retirement account customers, Jones spokesman John Boul told Reuters. He did not comment on how many years are being reviewed nor on what percentage of fund sales were made to retirement or charitable accounts.
On Tuesday, FINRA enforcement chief Bradley Bennett said the regulator is working on a pipeline of fee-waiver cases that began with self-reporting by firms. Through a spokeswoman, he declined to comment on whether Edward Jones is among the cases.
The self-reporting began after FINRA last June fined Bank of America’s Merrill Lynch $8 million and ordered it to repay $24.4 million to affected retirement plan and charitable account customers. Merrill, which did not admit nor deny the charges, had already repaid $64.8 million to customers who had been erroneously charged commissions on Class A shares that fund prospectuses promised to waive.
Most of the funds on Merrill’s retail brokerage platform promised to waive the commissions for retirement and charitable accounts, FINRA said. However, brokers failed to waive the fees or sold customers Class B and C shares that do not have upfront sales charges but are more expensive overall than Class A shares.
Raymond James Financial in January shaved $10.5 million of fund commissions from its fiscal first-quarter revenue and a month later told brokers who levied the commissions or sold more expensive share classes to reimburse customers out of their own pockets. The Florida-based firm quickly rescinded the plan, saying it would reimburse customers directly and upgrade its mutual fund ordering technology. (Reporting By Jed Horowitz; Editing by Christian Plumb)
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