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Baird to Pay $519K Over Excessive Mutual Fund Sales Charges

By Melanie Waddell

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The Financial Industry Regulatory Authority has censured broker-dealer Baird and ordered the firm to pay more than $519,646 in restitition for execessive mutual fund sales charges.

Between January 2015 and March 2021, Baird’s supervisory system “did not provide certain customers with mutual fund sales charge waivers and fee rebates to which they were entitled through rights of reinstatement offered by mutual fund companies,” according to FINRA’s order.

Consequently, the order states, eligible customers across more than 2,300 accounts paid approximately $519,000 in excess sales charges and fees during that period.

Because of these excessive charges, Baird violated FINRA Rules 3110 and 2010.

A right of reinstatement, according to FINRA, “allows a customer to redeem or sell shares in the fund and reinvest some or all of the proceeds, and receive a waiver of the sales load or a rebate on the [contingent deferred sales charge] CDSC, within a specified period of time (for example, 90 days), in the same share class of that fund or another fund within the same fund family subject to certain terms and conditions.”

FINRA credits Baird for its “extraordinary cooperation” in the matter, and therefore the order is for restitution plus interest, but no fine.

The matter originated from FINRA’s 2020 targeted examination regarding rights of reinstatement.

FINRA Rule 3110(a) requires FINRA members to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with the applicable securities laws, regulations and FINRA rules.

A violation of FINRA Rule 3110 also constitutes a violation of FINRA Rule 2010, “which requires that a member, in the conduct of its business, observe high standards of commercial honor and just and equitable principles of trade,” FINRA’s order explains.

During the relevant period, Baird’s system that provided customers with rights of reinstatement benefits on eligible transactions was not reasonably designed in two basic respects, according to FINRA.

First, the firm’s “oversight of discounts available through rights of reinstatement relied on an automated alert that was designed primarily to monitor for mutual fund switches that occurred within 90 days of a prior sale,” FINRA said.

“Thus, the alert was not designed to, and did not, capture all transactions eligible for reinstatement privileges because many funds’ reinstatement periods exceeded 90 days,” FINRA states.

Second, Baird “relied on an ineffective review of these alerts-based on a manual review of random samples-to supervise and confirm whether the firm credited eligible customers with reinstatement privileges,” according to the order. “This review process was not reasonably designed or implemented to permit Baird to detect excess sales charges and fees paid by its customers.”

Melanie Waddell

@Think_MelanieW

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