State Farm VP Management Corp., a Bloomington, Illinois based brokerage firm, submitted a letter of acceptance, waiver, and consent after the Financial Industry Regulatory Authority (FINRA) entered findings that the firm failed to establish, maintain, and enforce a supervisory system or written supervisory procedures (WSPs) reasonably designed to ensure timely delivery of mutual fund prospectuses, when it was required to provide all customers who purchased a mutual fund a prospectus for that fund no later than three business days after the transaction. FINRA's findings stated that the firm executed numerous mutual fund purchase transactions that required it to deliver a mutual fund prospectus to the purchasing customer, and as such, establish and maintain a supervisory system and WSPs reasonably designed to oversee and ensure the timely delivery of mutual fund prospectuses. FINRA also stated that the firm failed to establish, maintain, and enforce an adequate supervisory system or written procedures to supervise mutual fund prospectus delivery, when it had inadequate systems and procedures in place to monitor and ensure compliance with its WSPs directive concerning delivery of a current mutual fund prospectus by its brokers to each client prior to or at the time of the sales presentation in which the broker recommended or discussed a specific mutual fund. The firm was censured and fined a total $155,000 for all violations.
A prospectus is a document that discloses important information about an investment. It typically provides investors with material information about mutual funds, stocks, bonds, and other investments. Such information generally includes a description of the company's business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties, and any other material information.
In addition, FINRA stated that the firm also had inadequate systems and procedures in place to monitor the performance of its third-party service provider in order to ensure that mutual fund prospectuses were being delivered timely. The findings also included that the firm failed to enforce its procedures requiring delivery of undated mutual fund prospectuses to certain fund holders. The firm's procedures required delivery of mutual fund prospectuses following fund companies' annual updates to their prospectuses. However, during a period, the firm failed to deliver prospectuses to certain mutual fund holders following the annual updates of the funds' prospectuses. During that period, the firm's customers were given an option to opt out of house-holding when completing paper applications. The firm did not adequately monitor its third-party vendor to ensure the mailing list was complete, and as a result, the firm failed to deliver updated prospectuses to certain fund holders as its procedures required.
Moreover, FINRA found that the firm failed to implement a supervisory system and procedures that were reasonably designed to review, monitor, and store email brokers sent to customers. The firm allowed brokers to use an email program for pre-approved email communications with customers and used a third party service provider for email archival. For supervisory purposes, all brokers were required to copy all securities-related messages into a designated mailbox. The firm's compliance department was responsible for reviewing the emails in that box. The firm did not retain securities related emails not copied to this mailbox, but established procedures to verify whether brokers were complying with these directives. The firm was aware that not all of its brokers were complying with firm procedures. Because of the reviews, the firm discovered numerous incidents of noncompliance with firm guidelines regarding selected brokers' use of the mailbox. Although the firm made this discovery, it failed to conduct deeper reviews or modify its procedures.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. Please see our Instablog profile (left column) for ways to contact us and get answers to any of your questions about this blog post and/or any related matter.