BD to Pay Over $11 Million for Late Mutual Fund Trade Processing
A large broker-dealer agreed to pay restitution of $10.7 Million and a fine of $550,000 for failing to process mutual fund trades transmitted by mail or fax on the date received. FINRA alleges that the firm personnel mistakenly believed that paper trades could be processed up to two days after receipt. Rule 22c-1 of the Investment Company Act requires mutual fund orders to receive the price determined at the close on the date the order is received. As part of the restitution, FINRA required the firm to use the best price for the customer between the actual trade date and the price for the two prior market days. According to FINRA, the practice involved 37,000 client accounts and nearly 2 million orders over an 8-year period. FINRA also charged supervisory violations and failure to have adequate policies and procedures.
OUR TAKE: We suspect that the operations personnel confused “as of” practices with pricing requirements. In a retail environment, it may take a couple of business days to process trades, but investors must still get the trade date price. We are somewhat concerned by FINRA’s restitution methodology requiring the best price within a 3-day period.