Compliance and Regulatory Alerts | 11-07-23

Three Years Later, FINRA Continues to Scrutinize Rights of Reinstatement. Is Your Firm Next?

FINRA is continuing its focus on eligible customers receiving Rights of Reinstatement (“ROR”)* benefits where appropriate. This is the third year in a row that we have seen regulatory activity arising from this issue, and we are seeing significant activity now.

FINRA continues to scrutinize firms’ policies and procedures through examination and enforcement to ensure they are proper and working as intended, and that investors are receiving the benefits they are due. FINRA also expects remediation in instances where the policies or procedures did not work as intended.

We highly encourage firms to continue to review the effectiveness of their ROR-related procedures considering this ongoing regulatory focus and make updates to policy or remediation where necessary. Firms should be tracking mutual fund transaction activity and verifying that clients received the benefit of the ROR.

*ROR allows a customer to redeem or sell shares in the fund and reinvest some or all of the proceeds and receive a waiver of the sales load or a rebate on the CDSC paid on the sale, within a specified period of time (for example, 90 days), in the same share class of that fund or another fund within the same fund family subject to certain terms and conditions. The terms and conditions vary among funds. See previous Bates alert.

How Bates Helps Your Firm in ROR Matters:

Regulatory Investigations and Enforcement

Bates Group’s ROR assistance predates the 2020 Targeted Exam Letter inviting firms to self-report. Specifically, we have recently assisted eight firms in ROR-related matters—including three of the largest firms with settlements in this area—as well as dozens of other firms more broadly in relation to Share Class matters.

We work with firms subject to an ROR-related inquiry or examination by importing the firm’s mutual fund trading activity into our programmatic analysis environment, reviewing for ROR-eligible trading activity and identifying records evidencing that the ROR benefit that we identified as due (whether a front load waiver or CDSC rebate) were handled contemporaneously. Any missed benefits are then quantified and summarized at the investor or account level. Bates also provides insight into how FINRA has responded to various issues in prior ROR matters, assisting with any requests for additional information or support, until a result is agreed upon. We then prepare a repayment file, including calculating prejudgment interest, for the firm to use.

FINRA’s Changing Scope – What We Are Seeing

Bates has been involved in many in-house and outside counsel discussions with FINRA about the required analysis, acceptable approaches, and calculation methodologies employed to concretely identify instances in which clients were entitled to a front load waiver on a mutual fund purchase because of an ROR benefit. We have also seen the scope of FINRA’s focus change over time, for instance, to include missed rebates of Contingent Deferred Sales Charges (CDSC) in addition to missed front load waivers.

We are confident in our ability to help firms address and resolve their ROR regulatory and related issues. As a result of the volume of our work in this space over the years, Bates has established a proprietary database of historical mutual fund information, resulting in significant savings to our clients.