Finra Fines Kestra for Mutual Fund Share-Class Sale Violations
(Corrects fourth paragraph to remove reference to Kestra having reimbursed annuities customers as part of its 2016 settlement. It paid zero in restitution.)
The Financial Industry Regulatory Authority on Wednesday censured and fined independent broker-dealer Kestra Investment Services $225,000, and ordered it to reimburse about $1.95 million to some retirement plan and charitable organizations eligible for fee waivers on mutual fund purchases.
Kestra, formerly known as NFP Advisor Services, sold Class A shares with upfront fees, or Class B shares with higher ongoing 12b-1 distribution and service fees than those on A shares, to 3,205 customers who qualified for waiver of the front-end sales load typically charged on A shares, according to a letter of acceptance, waiver and consent it signed.
The violations occurred over eight years through February 2018, and the reimbursement sanction includes interest on the overcharges. A spokeswoman at Austin, Texas-based Kestra, which accepted the sanctions without admitting or denying the findings, did not immediately respond to a request for comment.
Kestra in 2016 agreed to a fine of $275,000 for failing to train and supervise advisors who inappropriately sold $52 million of high-cost L-share variable annuity classes with short surrender periods to customers who intended to hold the annuities for the long term, Finra wrote in the “relevant disciplinary history” section of the acceptance, waiver and consent letter. The regulator weighs past violations in determining the degree to which reimbursement should be supplemented by fines.
The A-share settlement continues a long series of sanctions regulators have been bringing against large and small firms for failing to train and supervise brokers about the discounts some fund companies provide to certain retirement plan and charitable organizations. Many mutual funds offer the waivers, which are disclosed in prospectuses that brokerage firms distribute to customers, Finra noted in the Kestra letter.
Merrill Lynch in 2014 agreed to pay Finra an $8 million fine over similar charges and to return another $24 million to harmed retirement plan and charitable organizations after previously reimbursing some $65 million. UBS Financial Services in 2016 agreed to pay a $250,000 fine and reimbursed customers more than $277,000.
Finra turned its attention to independent broker-dealers last year, ordering Commonwealth Financial and Lincoln Investment Planning to return $888,337 and $1.4 million, respectively, to clients who were overcharged.
Technically, Kestra violated Finra’s misconduct rule 3110 for failing to properly supervise its brokers and its “high standards of commercial honor” and just-trade rule 2010.
The Securities and Exchange Commission last year made a short-term offer to waive fines against broker-dealers who voluntarily confessed to putting customers in higher-cost fund shares The program ended in June, and an SEC enforcement official recently said that “lots of money” is expected to be returned to investors because of the program.