Mutual Funds

FINRA does not regulate mutual funds directly, but does regulate the broker-dealers and registered representatives that sell mutual funds. In this capacity, FINRA enforces rules on mutual fund point-of-sale disclosure and other sales practices.

FINRA Rule 2210 prohibits firms and registered representatives selling mutual funds from making false, exaggerated, unwarranted or misleading claims in communications with the public. The rule requires firms to file certain communications involving registered investment companies, including mutual funds, and exchange-traded funds (ETFs), with FINRA’s Advertising Regulations Department. Similarly, FINRA Rule 2211 governs this area for institutional sales material and correspondence.

These rules also require disclosure of fees, expenses and standardized fund performance in mutual fund performance sales materials. This requirement improves investor awareness of the costs of buying and owning a mutual fund. It facilitates the comparison of funds and makes the presentation of standardized performance data more prominent in the sales material.

FINRA currently is conducting a retrospective review of its communications rules to determine whether the rules are meeting their intended investor protection. In the ensuing action phase, FINRA staff intends to consider specific rule proposals or other initiatives resulting from its review assessment.

Complex Products

FINRA has highlighted sales practice concerns with certain complex funds products, including alternative mutual funds and non-traditional ETFs. Alternative mutual funds, or alt funds, have seen a significant increase in sales over the past several years. They often are marketed as a way for retail investors to invest in sophisticated, actively-managed hedge fund like strategies that will perform well in a variety of market environments. Many of the funds use various non-traditional asset classes and strategies.

FINRA recommends that firms refer to such funds based on their specific strategies, instead of bundling them under one umbrella category, such as alternative mutual funds. Firms must ensure that their communications about alternative funds accurately and fairly describe how the products work. The descriptions of the funds in sales material must be consistent with the representations in a fund’s prospectus.

FINRA has provided guidance to firms on their sales practice obligations relating to leveraged and inverse ETFs. While these ETFs may be useful in some sophisticated trading strategies, they are typically designed to achieve their stated objectives on a daily basis. They are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.

Recently FINRA sanctioned firms for selling leveraged and inverse ETFs without reasonable supervision and without having a reasonable basis for recommending the securities. FINRA found that the firms had failed adequate due diligence regarding the risks and features of the ETFs.

Breakpoints

Learn how mutual fund breakpoint discounts work. FINRA recommends that firms at the time of purchase of a mutual fund or periodically thereafter provide investors with a Written Disclosure Statement explaining the availability of breakpoint discounts.

Titlesort descendingTypeDate
Mutual Fund Breakpoint Refund Interest Calculator
Interest Refund Calculator helps member firms determine interest due on missed breakpoint discounts.
Tool / Resource02-08-2015
Frontier Funds—Travel With CareInvestor Alert09-10-2014
Alternative Funds Are Not Your Typical Mutual FundsInvestor Alert06-10-2013
SR-FINRA-2012-045Rule Filing09-30-2012
Regulatory Notice 12-02
FINRA Provides Guidance on Application of Communications Rules to Disclosures Required by Department of Labor
Notices01-12-2012
Regulatory Notice 11-49
FINRA Provides Guidance on Advertising Regulation Issues
Notices10-26-2011
Treasury's Guarantee Program for Money Market Mutual Funds: What You Should KnowInvestor Alert07-08-2010
Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold InvestorsInvestor Alert08-17-2009
Systematic Investment Plans—Educate Yourself Before You EnlistInvestor Alert10-12-2008
Class B Mutual Fund Shares: Do They Make the Grade?Investor Alert10-10-2008
Understanding Mutual Fund ClassesInvestor Alert10-05-2008
SR-FINRA-2007-011Rule Filing09-11-2007
Regulatory Notice 07-36
FINRA Clarifies Guidance Relating to SEC Regulation S-P under Notice to Members 07-06 (Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products)
Notices08-12-2007
Notice to Members 06-48
SEC Approves Amendments to NASD Rules 2210 and 2211 to Require Disclosure of Fees and Expenses in Mutual Fund Performance Sales Material;
Notices08-31-2006
Notice to Members 07-06
Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products
Notices02-12-2006
Remarks at the SIA Soft Dollars and Institutional Brokerage ConferenceSpeech09-18-2005
NASD Foundation Funds CFA Project to Increase Investor Knowledge of Mutual FundsNews Release04-12-2005
NASD Endorses Concise, Web-Based Point of Sale Mutual Fund DisclosureNews Release04-04-2005
NASD Fines Citigroup Global Markets, American Express and Chase Investment Services More Than $21 Million for Improper Sales of Class B and C Shares of Mutual FundsNews Release03-22-2005
NASD Charges American Funds Distributors, Inc. with Arranging $100 Million in Directed Brokerage Commissions for Top Sellers of American FundsNews Release02-16-2005
SR-NASD-2005-022Rule Filing02-03-2005
Notice to Members 05-04
SEC Approves Amendments to NASD Rule 2830(k) to Strengthen Prohibitions on Investment Company Directed Brokerage Arrangements
Notices01-13-2005
Notice to Members 04-72
Impermissible Use of Negative Response Letters for the Transfer of Mutual Funds and Variable Annuities (Changes in Broker-Dealer of Record)
Notices10-04-2004
SR-NASD-2004-141Rule Filing09-16-2004
NASD Comment Letter to SEC Regarding Disclosure for Transactions in Certain Mutual Funds and Other SecuritiesDocument05-03-2004

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