FINRA announced that it had fined a broker-dealer $1,000,000 for its failure to deliver prospectuses in a timely manner to customers who purchased mutual funds in 2009, and for failure to make timely amendments to Forms U4 and U5. In settling this matter, the broker-dealer neither admitted nor denied the charges, but consented to the entry of FINRA’s findings, which are summarized in this article.
Untimely Prospectus Delivery. FINRA found that in 2009 the broker-dealer failed to deliver prospectuses within three business days of the transaction, as required by federal securities laws, to customers who purchased mutual funds, resulting in a violation of FINRA Rule 2010. The broker-dealer had contracted with a third-party service provider to mail the prospectuses to customers. FINRA found that the broker-dealer did not take adequate corrective measures after broker-dealer officials received statistical data at quarterly meetings with service provider personnel showing that between four percent and nine percent of its mutual fund customers failed to receive required prospectuses by the settlement date for their transactions (“exceptions”). Additionally, the broker-dealer’s operations staff received daily reports on exceptions from the service provider and was in daily communication with the service provider regarding the resolution of exceptions. FINRA found that the primary cause of exceptions was the failure of certain mutual funds to ensure that the broker-dealer had enough paper copies of their prospectuses at all times and that the broker-dealer took no action to cause the mutual funds to address the shortfall problem. FINRA also faulted the broker-dealer for failing to use the service provider’s “print on demand” (“POD”) service extensively during the period in question. For its POD service, the service provider maintained electronic versions of the relevant prospectuses which it could print and send to the broker-dealer’s customers when the inventory of paper copies provided by the mutual fund was insufficient. FINRA also noted that the broker‑dealer’s management supervisory group responsible for prospectus delivery had conducted monthly statistical reviews showing that customers were not receiving mutual fund prospectuses on a timely basis.
Late Amendments to Forms U4 and U5. FINRA found that the broker dealer did not promptly report required information to FINRA regarding its current or former representatives. Under FINRA rules, a securities firm must ensure that information on its representatives’ applications for registration (Forms U4) is kept current in FINRA’s Central Registration Depository. A firm must also ensure that it updates a representative’s termination notice (Form U5) after the representative leaves the firm. These forms must be updated within 30 days of the firm learning that a significant event has occurred with respect to the representative. From July 2008 through June 2009, the broker-dealer filed 147 late amendments to the Form U4 relating to customer complaints, arbitrations, civil litigation, regulatory matters and bankruptcies, and 40 late amendments to the Form U5 relating to customer complaints arbitrators and civil litigation. These represented 8.1% and 7.6% of the amendments to the Form U4 and Form U5, respectively, that the broker-dealer filed during that period.
Prior Disciplinary Matters. The broker-dealer has previously been subject to two other FINRA disciplinary actions regarding similar matters. FINRA fined the broker-dealer $1,400,000 in 2009 because it had failed to deliver prospectuses and product descriptions to customers who had purchased any of nine different investment products in 2003 and 2004, and failed to maintain an adequate supervisory system to ensure such delivery was made. As part of the remedial undertakings for this prior disciplinary matter, an officer of the broker-dealer had executed an attestation on August 14, 2009 that the broker-dealer had implemented supervisory systems reasonably designed to achieve compliance with prospectus delivery requirements. Additionally, FINRA fined the broker-dealer $1,100,000 in 2009 because, during the period from 2003 through 2008, the broker-dealer failed to have policies and procedures in place to mail 800,000 required notifications to customers.