FINRA does not regulate mutual funds directly, but regulates the broker-dealers and registered representatives that sell mutual funds. In this capacity, FINRA enforces rules on mutual fund advertising, sales practices, including the sales loads that broker-dealers may charge, the incentives provided to registered representatives and the execution of mutual fund portfolio transactions. FINRA’s regulatory purview covers the following areas:
Under FINRA Rule 2210, firms must ensure that their mutual fund communications with the public are based on principles of fair dealing and good faith, are fair and balanced, and provide a sound basis to evaluate the facts about any particular security or type of security, industry or service. No broker-dealer may omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading. No broker-dealer may make any false, exaggerated, unwarranted, promissory or misleading statement or claim in any communication with the public, or publish, circulate or distribute any communication that the broker-dealer knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.
Members generally must file their retail communications concerning mutual funds with the FINRA Advertising Regulation Department within 10 business days of first use, unless a filing exception applies. A retail communication is defined as any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.
FINRA Rule 2210 also requires an appropriately registered principal of a firm to approve each retail communication before the earlier of its use or filing with FINRA. While the rule does not require principal pre-approval for correspondence and institutional communications, firms must establish and maintain written procedures for their supervision and review. In addition, the Rule has a recordkeeping requirement mandating firms maintain files that contain its communications with the public.
Sales Charges and Breakpoints
FINRA Rule 2341(d) prohibits firms from selling mutual funds if their sales charges are deemed “excessive.” The rule imposes various limits on both front-end and deferred sales charges depending on whether the fund imposes an ongoing asset-based sales charge or service fee, such as a Rule 12b-1 fee, and whether the fund offers rights of accumulation or quantity or “breakpoint” discounts. Rule 2341(d) also limits ongoing fund service fees and other ongoing asset-based sales charges.
Breakpoint discounts are volume discounts to the front-end sales load charged to investors who purchase Class A mutual fund shares. The extent of the discount depends on the amount invested in a particular family of funds. FINRA Rule 2342 prohibits sales of mutual funds shares in amounts below a breakpoint if the sales are made “so as to share in higher sales charges.”
FINRA has observed that in some instances customers have not received breakpoint discounts. FINRA has addressed this issue through examinations and enforcement actions. Multiple enforcement actions in 2015 resulted in millions of dollars in fines and restitution to customers. These actions underscore the need for firms to establish and maintain systems and controls to ensure that customers receive the breakpoint discounts they are due.
A firm’s procedures should include training for staff involved in the sale of Class A shares of front-end mutual funds. FINRA provides a training outline, which includes important breakpoint topics that firms should address in their training. FINRA also developed a checklist and worksheet that can assist firms gather the necessary information in order to ensure customers receive their breakpoint discounts. FINRA also recommends that firms provide investors with a Written Disclosure Statement explaining the availability of breakpoint discounts either at the time of purchase or shortly thereafter.
Cash & Non-Cash Compensation
FINRA members and their registered representatives are compensated for the sale of mutual fund shares in various ways, and the disclosure that investors receive depends upon the particular compensation arrangement. For example, member compensation that is deducted from the initial investment or from fund assets, such as sales charges and Rule 12b-1 fees, is disclosed in the fee table that appears in the mutual fund prospectus. Other forms of member compensation, such as payments from a mutual fund adviser for "shelf space," should also be disclosed.
FINRA Rule 2341 regulates cash and non-cash compensation arrangements in connection with the sale and distribution of investment company securities. The Rule contains broad prohibitions on the payment or receipt of non-cash compensation by FINRA members and their associated persons in connection with the sale of such securities, and allows non-cash compensation to be awarded only if it is structured in accordance with one of several limited exceptions. The Rule also requires firms to maintain records regarding cash and non-cash compensation.
In addition, the Rule prohibits firms from accepting cash compensation in connection with the distribution of mutual funds unless the compensation arrangement is disclosed in the prospectus.
FINRA reminds members that compensation arrangements may never undermine a member’s obligation to properly supervise its registered representatives, or a registered representative's obligation to make only suitable recommendations to customers. Members must adopt and implement procedures reasonably designed to ensure that all communications of their registered representatives concerning investment company products, whether written or oral, are fair and balanced. In recommending an investment company, registered representatives must disclose all material information, including the fund’s expenses and sales charges, investment objectives and risks.
FINRA has highlighted sales practice concerns with certain complex fund products, including alternative mutual funds and non-traditional ETFs. While there is no standard definition of alternative mutual funds, if a fund’s strategy involves non-traditional asset classes, non-traditional strategies or illiquid assets, the fund may be considered an alternative fund. 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 these 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 with the public regarding alternative funds present a fair and balanced picture of both the risks and benefits of the funds, and may not omit any material facts or qualifications.
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 highly complex financial products typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. As such, inverse and leveraged ETFs that are reset daily may be unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.
FINRA has sanctioned firms for selling leveraged and inverse ETFs without reasonable supervision and without having a reasonable basis for recommending the securities.
2022 Report on FINRA’s Examination and Risk Monitoring Program
The Books and Records section of the 2022 Report on FINRA’s Risk Monitoring and Examination Activities (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) relevant regulatory obligations and related considerations, (2) exam findings and effective practices, and (3) additional resources.
FINRA's Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see FINRA OGC Interpretative Guidance for more information.
OGC staff contact:
1735 K Street, NW
Washington, DC 20006
- FINRA Reminds Firms of Their Sales Practice Obligations for Alternative Mutual Funds04/19/2022
- FINRA Provides Guidance on Common Sales Charge Discounts and Waivers for Investment Company Products03/04/2021
- FINRA Provides Guidance on Application of Communications Rules to Disclosures Required by Department of Labor01/13/2012
- FINRA Provides Guidance on Advertising Regulation Issues10/27/2011
- Guidance on Disclosure Concerning the U.S. Treasury Department's Temporary Guarantee Program for Money Market Mutual Funds10/17/2008
- 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)08/13/2007
- Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products02/13/2007
- SEC Approves Amendments to NASD Rules 2210 and 2211 to Require Disclosure of Fees and Expenses in Mutual Fund Performance Sales Material09/01/2006
- SEC Approves Permanent Rules Concerning Bond Mutual Fund Volatility Ratings01/20/2006
- SEC Approves Amendments to NASD Rule 2830(k) to Strengthen Prohibitions on Investment Company Directed Brokerage Arrangements01/14/2005
- Impermissible Use of Negative Response Letters for the Transfer of Mutual Funds and Variable Annuities (Changes in Broker-Dealer of Record)10/05/2004
- NASD Reminds Firms of Sales Practice Obligations In Sale of Bonds and Bond Funds04/13/2004
- NASD Reminds Members of Their Duty to Ensure Proper Application of Discounts in Sales Charges to Sales of Unit Investment Trusts (UITs)03/30/2004
- NASD Requests Comment on Proposed Amendments to Rules 2210 (Communications With the Public) and 2211 (Institutional Sales Material)12/09/2003
- NASD Reminds Member Firms of their Obligations Regarding Mutual Fund Transactions and Directs Review of Policies and Procedures09/05/2003
- SEC Approves Extension of Pilot Relating to Bond Mutual Fund Volatility Ratings08/28/2003
- Refunds to Customers Who Did Not Receive Appropriate Breakpoint Discounts in Connection with the Purchase of Class A Shares of Front-End Load Mutual Funds and the Capital Treatment of Refund Liability08/25/2003
- NASD Requires Immediate Member Firm Action Regarding Mutual Fund Purchases and Breakpoint Schedules12/23/2002
- NASD Adopts Exemption From The Corporate Financing Rule For Interval Funds08/10/2000
- NASD Regulation Reminds Members Of Their Responsibilities When Advertising Recent Mutual Fund Performance04/10/2000
- NASD Reminds Members Of Their Obligations To Disclose Mutual Fund Fees12/01/1998
- SEC Approves Rule Change Relating To Non- Cash Compensation For Mutual Funds And Variable Products09/01/1998
- 2022 Report on FINRAs Examination and Risk Monitoring ProgramThe Books and Records section of the 2022 Report on FINRA’s Risk Monitoring and Examination Activities (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) relevant regulatory obligations and related considerations, (2) exam findings and effective practices, and (3) additional resources.February 09, 2022
FINRA is conducting a review of firms’ systems and procedures for providing customers waivers and rebates available through Rights of Reinstatement1 (RoR) on mutual fund purchases.
As part of this review, FINRA will request that each firm that receives this information request respond to the questions below with respect to the period January 1, 2017 through June 30, 2020 (the relevant period):November 11, 2020
- 2018 Exam Findings ReportThe Suitability for Retail Customers section of the 2018 Report on Exam Findings informs member firms’ compliance programs by describing recent findings and observations from FINRA’s examinations, and, in certain cases, also providing a summary of effective practices.December 07, 2018
- 2017 Exam Findings ReportThe Product Suitability section of the 2017 Report on Exam Findings informs member firms’ compliance programs by describing recent findings and observations from FINRA’s examinations, and, in certain cases, also providing a summary of effective practices.December 06, 2017
- GuidanceIn connection with the Mutual Fund Waiver Sweep and pursuant to FINRA Rule 8210, FINRA requests that the Firm provide the following documents and information to FINRA staff on or before June 10, 2016 regarding the above referenced Sweep.May 16, 2016
- Report / Study
NASD formed the Mutual Fund Task Force (“Task Force”) to consider issues relating to soft dollars, mutual fund portfolio transaction costs and distribution arrangements. The Task Force was established after discussions between the Securities and Exchange Commission (“SEC”) and NASD staffs, to provide guidance to the SEC as it considers these issues.March 29, 2005
- Report / Study
NASD formed the Mutual Fund Task Force (“Task Force”) in May 2004 to consider ways to improve the transparency of mutual fund portfolio transaction costs and distribution arrangements. The Task Force was established after discussions between the Securities and Exchange Commission (“SEC”) and NASD staffs, to provide guidance to the SEC as it considers the issues raised in a concept release concerning mutual fund portfolio transaction costs and a rule proposal relating to mutual fund distribution arrangements.November 11, 2004
- Report / Study
As part of its efforts to combat abusive market timing in mutual funds, the SEC intends to propose a mandatory redemption fee on short-term trades. On November 17, 2003, the SEC requested that NASD convene a working group of industry experts to consider how this initiative may be affected by the use of mutual fund omnibus accounts. This memorandum summarizes the views expressed by members of the Omnibus Account Task Force (Task Force) established by NASD.January 30, 2004
- GuidanceAt the request of the Securities and Exchange Commission ("SEC"), NASD convened and led a Joint NASD/Industry Breakpoint Task Force, with representatives from, among others, Investment Company Institute ("ICI"), Securities Industry Association ("SIA"), National Security Clearing Corporation ("NSCC"), broker/dealers, mutual funds, and transfer agents, to examine the difficulties that the financial industry experienced delivering breakpoint discounts on Class A mutual fund share sales and to develop recommendations to facilitate the complete and accurate delivery of breakpoint discounts in the future.July 22, 2003
- Report / Study
In a letter to NASD Chairman and Chief Executive Officer Robert R. Glauber, dated January 15, 2003, former Securities and Exchange Commission (“SEC”) Chairman Harvey L. Pitt requested that NASD, joined by the Securities Industry Association (“SIA”) and the Investment Company Institute (“ICI”), convene a task force to recommend industry-wide changes to address errors and missed opportunities to provide discounts in the calculation of sales loads charged on the purchase of mutual fund shares that carry a front-end sales load.July 12, 2003
- Compliance Tools
When considering their obligations to provide all available breakpoint discounts on sales of Class A shares of front-end load mutual funds, member firms may review the following Breakpoint Checklist and Breakpoint Worksheet, which may help member firms evaluate their breakpoint compliance programs and confirm whether they are capturing all relevant categories of information to provide customers all available breakpoint discounts.
- Compliance ToolsTo assist the financial industry in fulfilling its obligation to provide all available breakpoint discounts on sales of front end load mutual funds, the Joint NASD/Industry Task Force recommended that broker-dealers provide investors with a Written Disclosure Statement, explaining the availability of breakpoint discounts, at the time of purchase or on a periodic basis.
- GuidanceThe Joint NASD/Industry Task Force urges mutual funds to include these definitions in their prospectuses and other relevant materials as soon as is reasonably practicable.
- Compliance ToolsNASD directed all firms that processed more than a minimal amount of mutual fund transactions using an automated process to conduct a self-assessment of their mutual fund transactions in 2001 and 2002 and the sales discounts provided, and to submit the results to NASD. As of July 30, 2003, the 642 firms listed below submitted assessment results to NASD.
- FAQQuestions and answers regarding the Mutual Fund Breakpoint Assessment
- Compliance ToolsThe Joint NASD/Industry Task Force recommended two changes to mutual fund confirmations that are intended to help investors determine whether they received all the breakpoints discounts to which they were entitled on each mutual fund transaction.
- June 02, 2022
- FINRA Orders Merrill Lynch, Pierce, Fenner & Smith Inc. to Pay $7.2 Million in Restitution to Customers Overcharged for Mutual FundsJune 04, 2020
- July 17, 2019
- FINRA Sanctions Barclays Capital, Inc. $13.75 Million for Unsuitable Mutual Fund Transactions and Related Supervisory FailuresDecember 29, 2015
- FINRA Orders an Additional Five Firms to Pay $18 Million in Restitution to Charities and Retirement Accounts Overcharged for Mutual FundsOctober 27, 2015
- FINRA Fines Merrill Lynch $8 Million; Over $89 Million Repaid to Retirement Accounts and Charities Overcharged for Mutual FundsJune 16, 2014
- FINRA Orders J.P. Turner to Pay More Than $700,000 in Restitution for Unsuitable Sales of Leveraged and Inverse ETFs and for Excessive Mutual Fund SwitchingDecember 05, 2013
- June 11, 2013
- FINRA Orders SunTrust Investment Services to Pay $1.44 Million for Unsuitable UIT, Closed-End Fund and Mutual Fund TransactionsJuly 22, 2010
- FINRA Fines Bank Broker-Dealers $1.65 Million for Supervisory Failures in Variable Annuity, Mutual Fund and UIT TransactionsJuly 23, 2009
- FINRA Fines 25 Firms More Than $2.1 Million for Failures in Mutual Fund Breakpoint Review, Other ViolationsMarch 23, 2009
- December 08, 2008
- FINRA Fines Oppenheimer $1 Million to Settle Charges that It Produced Flawed, Incomplete and Untimely Data in Breakpoint Self-AssessmentOctober 30, 2007