Tuesday, February 24, 2009

FINRA Fines Wachovia for Suitability and Sales Charge Violations

FINRA announced last week that is has fined Wachovia Securities and Wachovia Securities Financial Network more than $4.5 million for suitability and other violations relating to the sales of mutual funds and Unit Investment Trusts (UITs). 

According to the FINRA release, "Wachovia Securities and made unsuitable sales of Class B and C shares and Wachovia Securities Financial Network made unsuitable sales of Class B shares." Wachovia Securities recommended the purchase of B and C Class shares, and Wachovia Securities Financial Network recommended the purchase of B shares, without considering, on a consistent basis, that for certain customers, an equal investment in Class A shares would have been more appropriate.

In its announcement, Susan L. Merrill, FINRA's Executive Vice President and Chief of Enforcement reiterated the duty of funds and brokers to consider suitability when recommending securities:

"Firms must consider all relevant factors when recommending securities,"  "The failure to provide available discounts or recommend a suitable share class wrongly increases costs to investors. We are pleased that through these settlements millions of dollars are being returned to customers."

In addition, to the suitability violations, FINRA concluded that customers paid approximately $2.71 million in excessive sales charges because Wachovia Securities failed to provide rollover discounts for more than15,000 customer purchases of UITs, and failed to apply valid breakpoint discounts for approximately 5,000 customer UIT purchases. 

NAV Transfer programs were offered by many mutual fund families from 2001 through 2004. Under these programs, customers who redeemed fund shares for which they had paid a sales charge were permitted to use the proceeds to purchase Class A shares of a new mutual fund at NAV - that is, without paying another sales charge. FINRA found that Wachovia Securities failed to ensure that eligible investors received the benefit of available NAV transfer programs. As a result, certain customers incurred front-end sales charges they should not have paid, or purchased other share classes that unnecessarily subjected them to higher fees and the potential of contingent deferred sales charges.

FINRA also cited Wachovia Securities for inadequate supervisory procedures relating to UIT, NAV transfer program and Class B and C sales, and cited Wachovia Securities Financial Network for failing to have appropriate supervisory procedures relating to the sale of Class B shares.

The text of FINRA's February 12, 2009 News Release is available at:  http://www.finra.org/Newsroom/NewsReleases/2009/P117836