Mutual Fund Fraud, Misrepresentation and Negligent Supervision Attorney, Russell L. Forkey, Esq.
TD Ameritrade, Inc. (CRD #7870, Bellevue, Nebraska) submitted a Letter of Acceptance,
(FINRA Case #2010022922701).
Waiver and Consent in which the firm was censured and fined $100,000. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it was required to provide its customers who purchased mutual funds a prospectus for that fund no later than three business days after the transaction but it failed to timely deliver prospectuses to its customers as required by Section 5(b)(2) of the Securities Act. The findings stated that the firm satisfied its mutual fund prospectus delivery obligation by contracting with a third-party service provider for the delivery of prospectuses, including mutual fund prospectuses. The findings also stated that on a daily basis, the firm forwarded to the service provider an electronic file containing a list of all transactions requiring customer delivery of a prospectus; in response to the list, the firm received daily reports from the service provider identifying, among other things, all mutual fund transactions for which the service provider had being unable to deliver a prospectus to the firm customer by the settlement date (the exceptions); the service provider also provided the firm with an explanation code for each exception identified in the reports. The findings also included that the firm’s procedures required its operations department on a daily basis to review the reports, correct any issues identified as exceptions, and provide the updated information back to the service provider in order to ensure that the service provider delivered the appropriate offering documents; the firm’s personnel had daily contact with the service provider’s personnel to resolve exceptions on the reports, along with other issues relating to delivery of prospectuses. FINRA found that the firm failed to deliver on time, or failed to ensure that its service provider delivered on time, prospectuses to certain customers who purchased mutual funds; in numerous separate instances, the firm customers who purchased mutual funds did not receive a prospectus within three business days of the transaction. FINRA also found that the primary cause of the late delivery was the failure of certain mutual fund companies to maintain adequate supplies of paper copies of prospectuses; as a result, for many purchases from these fund companies, neither the service provider nor the firm could obtain a prospectus to provide to the customer on time and the firm did not take steps to influence those fund companies to keep adequate stocks of prospectuses. In addition, FINRA determined that the firm did not take other actions available to it to ensure that its customers were receiving prospectuses on time; for instance, the service provider offered a print on-demand service to allow the service provider to obtain electronic copies of mutual fund prospectuses from mutual fund companies that offered them, and then to print copies of the prospectuses and send them to the firm’s customers, but the firm did not adequately address its prospectus delivery failures by using this service. Moreover, FINRA found that the firm had noticed that its customers were not receiving prospectuses on a timely basis and firm operations personnel who reviewed daily reports and updated information for the service provider had regular contact with the provider to resolve issues relating to items appearing on the report. Furthermore, FINRA found that the service provider met with firm officials on a quarterly basis to provide statistical data regarding, among other things, mutual fund prospectus delivery; during these meetings, the statistical data the firm received indicated that the firm’s customers were not timely receiving prospectuses in 4 percent to 5 percent of the mutual fund transactions the firm conducted. The findings also stated that because of the firm’s failure to deliver prospectuses on time to many of its customers who purchased mutual funds, they were not provided with important disclosure information about the products by the settlement date.