FINRA sanctioned Investors Capital Corporation for disadvantaging certain retirement plan and charity customers that were eligible for mutual fund sales charge waivers by failing to waive applicable sales charges, resulting in overpayments and higher ongoing expenses and fees.
The findings state that from 2009 until 2017, Investors Capital Corp sold Class A mutual fund shares with a front-end sales charge and sold Class B/C shares with deferred sales charges and/or higher ongoing expenses to customers who FINRA says should have received sales charge waivers and, thus, overpaid for these securities.
This follows FINRA's imposition of a $1.1 million penalty in 2016 against Cetera Financial Group's Investors Capital Corp for unsuitable short-term UIT transactions and complex steeper note sales. Investigators found that these transactions similarly subjected customers to additional sales charges and fees, and that Investors Capital failed to provide sales charge discounts to eligible customers, including elderly clients for whom the sales were unsuitable.
For example, although Class A shares may not have higher ongoing fees, brokers may have unsuitably recommended a retirement plan customer purchase Class B, C, or R shares, which typically do not have a front-end sales charge, but do have higher ongoing fees than Class A shares.
Thus, the regulator argued, a retirement plan customer eligible for a Class A sales charge waiver would have no reason to purchase any other share class—such as Class B, C, or R shares—that has a sales load or higher annual expenses.
Investigators concluded that Investors Capital overcharged eligible retirement plan and charitable organization clients for an eight-year period due, in part, to the firm's failure to establish and maintain supervisory systems and procedures reasonably designed to detect and apply sales charge waivers, thus failing to waive sales charges for eligible customers even when the mutual funds' own prospectuses disclosed the availability of sales charge waivers.
The firm estimated that eligible customers were overcharged by approximately $377,000 for mutual fund purchases from 2009-2017, and agreed to pay restitution of about $437,674 to eligible customers.
The document does not indicate whether clients who received recommendations to purchase non-Class A shares, such as Class R mutual fund shares, were part of the settlement; eligible customers were solely defined as those customers who "purchased mutual fund shares for which an available sales charge waiver was not applied."
Because Class R shares, for instance, do not typically contain sales charges, it would follow that purchasers of these products were not necessarily part of the settlement, though these customers may well have been harmed by the firm's failure to apply sales charge discounts or waivers.
If you have invested with Investors Capital Corporation or with any broker, financial adviser, or firm who has failed to apply sales charge waivers to applicable Class A, B, or C mutual fund purchases, or who has unsuitably recommended high-fee and operating expense products or share classes, and this has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.