← Broker database 2022-12-22
Morgan Stanley Ordered to Pay $802,483 in Restitution for Mutual Fund Sales Charge Waiver Failures
According to FINRA, Morgan Stanley Smith Barney LLC was censured and ordered to pay $802,483.47, plus interest, in restitution to customers for supervisory system deficiencies that prevented certain customers from receiving mutual fund sales charge waivers and fee rebates to which they were entitled.
The firm'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. The firm's system that provided customers with rights of reinstatement benefits on eligible transactions was not reasonably designed in three respects.
First, the system evaluated eligibility for rights of reinstatement benefits from the date of the sale's settlement as opposed to execution. Therefore, certain customers whose trades executed within the settlement window (a purchase before the sale settlement) did not receive rights of reinstatement benefits to which they were entitled. Second, the system contained an account-coding error that incorrectly excluded four qualified plan account types from receiving rights of reinstatement benefits. Third, the outside vendor that the firm engaged to identify and provide contingent deferred sales charge waivers on eligible transactions failed to process the rebates it identified for customers.
As a result of these supervisory deficiencies, the firm did not provide certain accounts with rights of reinstatement benefits to which they were entitled, and customers paid $802,483.47 in excess sales charges and fees. The firm has since enhanced its procedures, resumed responsibility over the CDSC-waiver process rather than relying on the vendor, introduced a logic change to correct the account-coding error, and introduced new daily reports to help identify transactions impacted by the settlement-window limitation. Subsequently, the firm shortened the settlement period for all domestic mutual fund transactions from two days to one day, further limiting the impact of the settlement-window limitation.
Rights of reinstatement allow investors who have sold mutual fund shares to repurchase shares of the same fund family within a specified period without paying a new sales charge. This benefit recognizes that the original sales charge already compensated the broker and that investors should not be doubly charged when they are essentially returning to a previous investment.
This case demonstrates that even at large, well-established firms, systems failures can result in customers being overcharged. The nearly $800,000 in excess charges represents money that should have stayed in customers' accounts to compound over time. For investors, this case underscores the importance of understanding all fees associated with mutual fund investments and ensuring that you receive any waivers or discounts for which you qualify.