BD Whacked with $1 Million Fine for Late Prospectus Delivery
FINRA fined a large broker-dealer $1 Million for failing to deliver mutual fund prospectuses to customer within 3 business days, as required by the securities laws. FINRA alleges that the BD’s fulfillment vendor notified the BD that customers did not timely receive prospectuses primarily because the underlying mutual fund companies did not provide an adequate supply of paper prospectuses. FINRA charges that the BD, fully aware of the fulfillment problems, “did not take steps to change the practices of those fund companies that did not keep adequate stocks of prospectuses.” FINRA noted a prior disciplinary action against the same BD for failing to provide prospectuses.
OUR TAKE: We do not argue with FINRA’s legal analysis. However, it is difficult for an intermediary to force the underlying mutual fund companies to provide enough prospectuses. Presumably, the distribution agreements with the fund companies require timely fulfillment, but that will be cold comfort when dealing with a 3-day timeframe.