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

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.”