FINRA’s Evolving Enforcement Focus on Rights of Reinstatment

Since 2020, Bates Group has assisted numerous financial services firms in responding to FINRA’s Rights of Reinstatement (“ROR”) inquiries and enforcement actions. Based on the work we are now doing with clients, this Alert updates a related but new FINRA enforcement initiative, resulting in a different and new ROR direction we are helping clients navigate.

What Has Changed in FINRA’s ROR Enforcement Approach

In FINRA’s previous ROR enforcement initiative, the focus was on instances where a right of reinstatement benefit may have been missed, either in the form of a waived front load fee or a rebated CDSC fee. The analysis generally began with a purchase which followed a sale within the same mutual fund family, provided other ROR requirements (such as the eligibility window) were met. The current focus can be characterized as a mutual fund switching review.

A recent FINRA order outlines this new approach. Whereas FINRA previously did not scrutinize situations in which a mutual fund was sold and then a subsequent purchase made in a new mutual fund family, this scenario is now central to its latest enforcement initiative. Rather than focusing solely on the mechanical question—did the firm correctly provide the ROR benefit owed to investors—FINRA’s new approach examines whether and under what circumstances it is appropriate to switch from one mutual fund sponsor to another when doing so results in an additional front-end load or the forfeiture of a CDSC rebate.

Practical Considerations for Responding to FINRA Inquiries

Bates Group helps firms and their counsel address FINRA’s evolving approach by analyzing the facts around sale-and-purchase combinations (for example, whether intervening activity in the account between the sale and purchase, making it unclear that a true “switch” occurred) and by evaluating the differences between the selected funds based on their underlying characteristics.

For example, if shares in a Vanguard High Income Fund were sold and shares of a Fidelity Growth Fund were subsequently purchased, Bates Group would perform a data-driven comparison of the Fidelity Growth Fund that was purchased to the Vanguard Growth Fund that was an alternative had the investor stayed with Vanguard. Facilitating this kind of comparison is Bates Group’s extensive database of historical mutual fund information, which allows us to compare fund and manager ratings, historical performance, stated benchmark, asset allocation, geographic exposure, etc.

This information helps contextualize why the sale and purchase were made (for instance, where the Vanguard Growth Fund provided European large cap exposure whereas the investor wanted the small cap North American exposure provided by the Fidelity Growth Fund). Numerous factors can be weighed or tailored to align with the specific circumstances of each transaction. Should it become desired, our team can also calculate potential investor remediation for settlement purposes.

Bates Group has been a trusted partner to leading law firms, financial services companies, and regulators for over 40 years, delivering expert consulting and tailored solutions that help clients navigate regulatory, compliance, and litigation challenges.

In an era of evolving regulations and heightened scrutiny, we help broker-dealers, investment advisers, banks, fintechs, and financial institutions nationwide reduce risk, meet regulatory expectations, and resolve complex disputes with clarity and confidence.