A registered broker-dealer recently executed a Letter of Acceptance, Waiver and Consent (the “AWC”) with FINRA regarding allegations that it failed to deliver prospectuses in a timely manner to customers who purchased mutual funds in 2009, resulting in a violation of FINRA Rule 2010. 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.
FINRA found that the broker-dealer did not take adequate corrective measures to ensure timely delivery of prospectuses following mutual fund transactions despite being on notice that not all customers were receiving prospectuses within three business days of their transactions, as required by federal securities laws. The broker-dealer had contracted with a third-party service provider to mail the prospectuses to customers. The service provider provided daily reports to the broker-dealer identifying, among other things, a cumulative list of all mutual fund transactions for which the service provider had been unable to deliver a prospectus by the settlement date (“exceptions”), the number of days that each prospectus was late and reasons for the exceptions. The broker-dealer’s procedures required its operations department on a daily basis to: review the exception report, correct any issues identified as exceptions, and provide the updated information back to the service provider. As a consequence, the broker-dealer’s operations staff was in daily communication with the service provider regarding the resolution of exceptions. In addition, at quarterly meetings with service provider personnel, broker-dealer officials received statistical data showing prospectus delivery exceptions for between four percent and five percent of the broker-dealer’s mutual fund customers.
FINRA found that the primary cause of exceptions was that certain mutual fund companies failed 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 take other actions available to it to ensure that its customers were receiving prospectuses on time, including noting that the broker-dealer did not make use of 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 a mutual fund was insufficient.
The broker-dealer agreed to be censured and to pay a monetary fine in the amount of $100,000.