Thursday, February 28, 2008

Brokerages fined over Improper Mutual Funds Sales & Transfer Practices

According to the recent Reuters’ news report[i], FINRA (Financial Industry Regulatory Authority), a regulatory agency that regulates more than 5,000 brokerage firms, “…units of Merrill Lynch & Co (MER.N) and UBS AG (UBSN.VX), have agreed to pay $2.4 million in fines and reimburse more than $20 million to customers to settle probes into improper mutual fund sales and transfers…”

Here is the breakdown of the regulatory issues and a quick review of the risk events and corrective actions required by the regulatory findings:

(click the picture to enlarge)

While the findings seems to be straightforward, there are additional questions left unanswered, such as:

How is that it has taken nearly four years after the fact to find the violations?

If Wells Fargo was able to find the violation, then why didn’t the other firms?

Do the other brokerages not have a risk management program?

When did Wells Fargo identify the violation? Just before FINRA came in?

What changes did the brokerage firms agree to make as a part of the FINRA finding?

By when will the brokerage firms reimburse the customers?

Is there a stated timeline and deadline?

How will they deal with customers who are deceased?

How will they deal with incorrect addresses for the customers?

How much will they spend to fully comply with the required corrective action?

What is the total cost (regulatory fine + cost of reimbursing customers) of the corrective action?

Of course there additional questions that any experienced risk manager will ask but the overriding question that a senior executive should ask is: Why did it take FINRA to identify the violations and not their internal audit or risk management groups?

I wonder if there are other brokerage firms whose risk management units are now kicking it into high gears and carefully reviewing their existing supervisory systems around improper mutual fund sales and transfers of classes B and C shares. Let me know your thoughts.

Ed Kim

Sphere: Related Content

No comments: