In February 2019, FINRA fined Kestra Investment Services, LLC and required the firm to pay $1,947,704 in restitution for overcharging Eligible Customers for mutual fund purchases, as well as a fine of $225,000 and remediation to Eligible Customers who did not receive, the applicable mutual fund sales charge waiver.
FINRA found that Kestra disadvantaged certain retirement plan and charitable organization customers that were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge. FINRA found that instead of selling these customers Class A shares with no front-end sales charge, Kestra sold these customers Class A shares with front-end sales charge or Class B or Class C shares with back-end sales charges and higher ongoing fees and expenses.
It is alleged that Kestra relied on its financial advisers to determine the applicability of sales charge waivers, but it failed to maintain reasonably designed written policies or procedures to assist financial advisors in making this determination.
According to the Letter of Acceptance, Waiver & Consent, “Class A shares typically are subject to a front-end sales charge when originally purchased, and have annual fund expenses, including ongoing distribution and service fees that are typically 0.25 percent. The selling broker-dealer typically receives the majority of the front-end charge as a sales concession paid by the customer. Investors purchase Class A shares at the applicable Net Asset Value (‘NAV’), plus the initial sales charge or concession. Many funds, however, offer certain investors a waiver of the initial sales charge associated with Class A shares under certain circumstances… Class B and C shares typically do not carry a front-end sales charge but have significantly higher distribution and service fees (typically 1.00 percent) and maybe subject to a contingent deferred sales charge (‘CDSC’).”
The different sales charges, breakpoints, waivers and fees associated with different share classes affect the return customers receive from mutual fund investments.
“If an investor qualifies for a Class A sales charge waiver and purchases Class A shares, the investor will not pay a front-end sales load. In contrast, a purchase of Class B or C shares of the same fund will be subject to higher ongoing fees, as well as potential application of a CDSC. Therefore, if an investor qualifies for a Class A sales charge waiver, there would be no reason for the investor to purchase any other class of shares that has a sales load and/or higher annual expenses.” Additionally, Many mutual funds waive the up-front sales charges associated with Class A shares for Eligible Customers – retirement plans and/or charitable organizations.”
It is alleged that Kestra failed to apply the waivers to mutual fund purchases made by Eligible Customers and instead sold them Class A shares with a front-end sales charge or Class B or C shares with back-end sales charges and higher ongoing fees and expenses. These sales disadvantaged Eligible Customers by causing such customers to pay higher fees than they were actually required to pay.
It is alleged that Kestra failed to reasonably supervise the application of sales charge waivers and share class determinations for eligible mutual fund sales. And, Kestra failed to establish reasonably designed controls to detect instances in which they did not provide sales charge waivers to Eligible Customers in connection with their mutual fund purchases.
As a result of the failure of Kestra to apply available sales charge waivers, the FINRA found that Kestra overcharged Eligible Customers approximately $1,648,984 for mutual fund purchases made between July 1, 2009 and February 22, 2018. Kestra was censured and agreed to pay $1,947,704 in restitution to Eligible Customers, a fine of $225,000, as well as remediation to Eligible Customers who did not receive, the applicable mutual fund sales charge waiver.
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, Kestra Investment Services, LLC may be liable for investment or other losses suffered by its customers.
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