FINRA Fines Wachovia Units More Than $4.5 Million for Failures Relating to Trust and Mutual Fund Sales
Firm Provides More than $5.4 Million in Remediation to Customers
Washington, DC — Financial Industry Regulatory Authority (FINRA) announced today that it has fined two Wachovia units more than $4.5 million for violations related to the sales of mutual funds and Unit Investment Trusts (UIT). More than $5.4 million has been returned to affected customers.
Wachovia Securities was fined $4.41 million for its failure to provide investors with sales charge discounts in eligible UIT transactions, its failure to ensure that investors received the benefit of Net Asset Value (NAV) transfer programs in applicable mutual fund purchases and for suitability violations related to the sale of Class B and C mutual fund shares. Wachovia Securities Financial Network was fined $150,500 for suitability violations related to improper Class B share sales. The fines reflect the $4 million-plus in additional commissions the firms received by selling Class B and C shares rather than Class A shares.
Wachovia has already returned over $2.4 million to Class A purchasers in connection with 4,200 NAV transfer transactions and approximately $3 million to customers in connection with over 20,000 UIT transactions. As part of the settlement, the firms will also provide remediation to 5,850 households that purchased Class B and C shares in over 14,500 transactions and to additional eligible NAV customers who did not receive the benefit of NAV transfer programs.
"Firms must consider all relevant factors when recommending securities," said Susan L. Merrill, FINRA's Executive Vice President and Chief of Enforcement. "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."
UITs are investment companies that offer redeemable shares, or units, of a generally fixed portfolio of securities in a one-time public offering and terminate on a specified date. During the relevant period, UIT sponsors generally offered sales charge discounts to investors, known as "breakpoint discounts" and "rollover discounts." A breakpoint discount is a reduced sales charge based on the dollar amount of the purchase - the higher the dollar amount, the deeper the discount. A rollover discount is a reduced sales charge that an investor is entitled to when he or she purchases a new UIT from the same sponsor using the proceeds received from a terminated UIT.
FINRA found that Wachovia Securities failed to provide rollover discounts in connection with over 15,000 customer purchases of UITs. The firm also failed to provide breakpoint discounts in connection with approximately 5,000 customer UIT purchases. As a result, customers paid approximately $2.71 million in excessive sales charges.
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 found that Wachovia Securities 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 Class B and C shares, and Wachovia Securities Financial Network recommended the purchase of B shares, without considering, on a consistent basis, that an equal investment in Class A shares would have generally been more advantageous for certain customers.
FINRA also found that Wachovia Securities had inadequate supervisory procedures relating to UIT, NAV transfer program and Class B and C sales and Wachovia Securities Financial Network had inadequate supervisory procedures relating to Class B share sales.
Each firm settled these matters without admitting or denying the allegations, but consented to the entry of FINRA's findings.
FINRA offers a number of online resources to help investors inform themselves about mutual fund investing, including the Investor Alerts Understanding Mutual Fund Classes, Class B Mutual Fund Shares: Do They Make the Grade?, Net Asset Value Transfers: Look Before You Leap into Another Mutual Fund and Mutual Fund Breakpoints: A Break Worth Taking.
FINRA's Web site (www.finra.org) also offers a sophisticated, user-friendly Fund Analyzer that allows investors to review the fees and potential discounts for more than 18,000 mutual funds, Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs). The Fund Analyzer also calculates and demonstrates the impact of fees and expenses on fund performance.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2008, members of the public used this service to conduct 11.6 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through comprehensive regulation. FINRA touches virtually every aspect of the securities business - from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and firms.
For more information, please visit our Web site at www.finra.org.