Compliance and Regulatory Alerts  |  09-21-20

FINRA Enforcement Turns Up Heat on Mutual Fund Direct Business and Firms That Are Brokers of Record

FINRA Enforcement Turns Up Heat on Mutual Fund Direct Business and Firms That Are Brokers of Record

For more than 20 years, regulators have expressed interest in securities firms designated as the “broker of record” for client mutual fund transactions executed directly at mutual fund sponsors. Historically that focus has been on payments made to those firms by the mutual fund sponsors and the firms’ obligations to supervise those transactions (including making sure that clients were properly profiled, and that the transactions were suitable). Over the years, some firms have addressed these regulatory concerns by designing systems and implementing policies and procedures to collect client profile and direct transaction data, developing “shadow” systems, and otherwise incorporating mutual fund direct transactions into their supervision and compliance systems.


That focus continues, as FINRA Enforcement has initiated enforcement actions centering around client impact, remediation, and issues related to transaction supervision and suitability. As a result, clients have turned to Bates to discuss and engage us on these matters. Our work has included a lookback at categories of mutual fund transactions over a period of six years to identify those that would have been flagged for further review had they gone through the firm’s supervision systems, as well as an assessment of client impact (if any) for those transactions.

Our Big Data and Compliance-related activities include, but are not limited to:
  • Intaking and processing large amounts of data from firms and dozens of relevant fund companies, addressing data cleansing and other issues to ensure data integrity thereby allowing for important analyses and scoping;
  • Applying the firms’ supervisory parameters to that data in order to identify alerts that would have been flagged for further review had the transactions been on the firms’ blotters; 
  • Correctly identifying those accounts or transactions that may have been adversely impacted and isolating them from the overall population of direct transactions that would have been flagged for further analysis;
  • Creating detailed and summary reports of transaction data that may be used to identify where there is a direct client impact because of those transactions;
  • Calculating, as appropriate, the economic impact to the client for transactions identified as at issue;
  • Creating detailed and summary reporting related to sampled transaction categories, to facilitate root cause analysis;
  • Having our Data and Compliance Teams execute manual supervision/suitability analyses (both quantitative only [e.g., switching] and putting eyes on transaction details based on individual facts and circumstances); and
  • Working with the firms and their in-house and outside counsel to summarize findings to provide to FINRA and for ultimate remediation, as necessary.

The categories of FINRA’s interest and inquiry (and our work, detailed above) include breakpoints, the appropriateness of different share class transactions, switching, concentration, conflicts of interest, compensation, and other suitability and supervision considerations. Also under consideration is our assistance with repapering accounts and otherwise addressing gaps in profile data (e.g., time horizon).

But Wait…FINRA Isn’t Stopping There…

Inquiries today do not end with mutual fund direct transactions. FINRA has also indicated that they will be looking at variable annuity direct transactions, and we will bring our extensive VA and mutual fund experience and expertise to bear in these matters.


Contact us today to learn how we can support your team and your clients.

David Birnbuam, Managing Director - or 917-273-2682

Alex Russell, Managing Director, White Collar, Regulatory and Internal Investigations -


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