FINRA is Reviewing Firms’ Systems and Procedures for Providing Customer Waivers/Rebates through Rights of Reinstatement (RoR) on Mutual Fund Purchases

FINRA is conducting a targeted review of brokerage firms' systems and procedures for providing customers waivers and rebates available through Rights of Reinstatement (RoR) [1] on mutual fund purchases. (See “Targeted Examination Letter on Rights of Reinstatement (RoR)” - November 2020.) While we do not know which firms will be selected, it is best that firms review their procedures in light of this review.

As part of this review, FINRA will request each firm that receives this information request respond to the questions below with respect to the period of January 1, 2017 through June 30, 2020 (“the relevant period”):

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. If so, please 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.

Analysis

Bates Compliance Managing Director Hank Sanchez recommends that among other responses, “Firms should be tracking switches and verifying that clients received the benefit of the ROR, and also considering switches in the context of their obligations under Reg BI.”

Bates Case Examples

Alex Russell, Managing Director, White Collar, Regulatory and Internal Investigations, shares how Bates’ experience in accounting for rights of accumulation and letters of intent in earlier regulatory share class initiatives is similar to RoR in two ways: “The necessity to apply historical data that is difficult to locate and the impact to the client in terms of front load paid.” Russell notes that Bates developed methodologies to work around the data limitations that were not unacceptable to FINRA in order to calculate harm to clients (after first reducing the population to only those who had been actually harmed).

How Bates Helps

Regulatory Investigations and Enforcement

Bates Group supports counsel in FINRA and SEC investigations in identifying harmed investors and quantifying that harm. This includes mining large datasets and providing clear and usable analysis. In connection with FINRA’s announcement, Bates can help provide a means to work around missing data, which is often a challenge clients face, and can calculate the harm to investors in a variety of ways (e.g., the differential between the charge assessed and the correct charge, after first identifying the targeted population of investors that have been impacted, and/or hypothetical performance of the increased share quantity the investor would have held had they not paid the higher fee, etc.). These calculations are sometimes presumed to be straightforward—if they should not have paid a sales charge, then the fee they paid is the harm—but there are nuances we can help bring to light that may reduce the repayment that needs to be made.

Compliance Solutions

Bates works with clients to develop programs to help mitigate conflicts of interest associated with mutual fund share class selection and purchases. We have developed procedures relating to due diligence, approval, ongoing reviews, and disclosures. Additionally, we assist firms with testing these and other types of conflicts-related programs to ensure compliance with internal policies and procedures, as well as regulatory requirements and expectations.

 

Contact Bates and let us put our experience to work for your firm:

• Alex Russell, Managing Director, White Collar, Regulatory and Internal Investigations

email: arussell@batesgroup.com phone: 971-250-4353

• David Birnbaum, Managing Director

email: dbirnbaum@batesgroup.com phone: 917-273-2682

• Scott Lucas, Managing Director, Regulatory and Internal Investigations

email: slucas@batesgroup.com phone: 971-250-4344

• Hank Sanchez, Managing Director, Bates Compliance

email: hsanchez@batesgroup.com phone: 504-450-9632