In new guidance, FINRA offered recommendations on investment companies' use of sales charge discounts and waivers on investment company products.

In its Notice, FINRA outlined frequently observed examination and enforcement matter findings. Among them, firms (i) had inadequate written supervisory procedures ("WSPs") concerning prospectus discounts, surveillance controls and alert thresholds, and (ii) did not adequately supervise associated persons. Additionally, FINRA found that firms failed to (i) capture necessary information on their transaction blotters, (ii) capture information concerning other holdings of customers and (iii) surveil for circumstances in which eligible customers did not receive discounts.

In order for firms to improve their supervisory systems with regard to sales charge discounts and waivers, FINRA recommended that firms consider whether:

  • their WSPs (i) cover all relevant discounts and fee waivers, (ii) address eligibility for multiple discounts, and (iii) provide for the collection and analysis of data regarding customer holdings and across accounts;
  • their tracking for investor eligibility includes (i) a mechanism for tracking relevant time periods, (ii) controls for methods of determining discount and waiver eligibility, and (iii) better disclosures to customers;
  • their employee training is adequate;
  • their automated tools and exception reports are sufficient; and
  • they have remediation and restitution procedures for customers and disciplinary measures for the associated persons responsible for the missed discounts or waivers.

Commentary

FINRA provided extremely broad guidance on necessary practices in connection with the sale of investment funds to retail customers. Fully implementing the FINRA guidance would require coordination and cooperation by all parts of a firm, including considerable assistance from operations.

Primary Sources

  1. FINRA Regulatory Notice 21-07: FINRA Provides Guidance on Common Sales Charge Discounts and Waivers for Investment Company Products

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