FINRA Tears Into Prudential Affiliate Over Mutual Fund Paper Orders
December 26, 2012
The Financial Industry Regulatory Authority has ordered Pruco Securities, a securities broker-dealer owned by Prudential Financial, to pay more than $10.7 million to customers who placed mutual fund orders via facsimile or mail and received an inferior price for their shares.
FINRA also fined Pruco $550,000 for its pricing errors and for failing to have an adequate supervisory system and written procedures in this area.
According to FINRA, one of Pruco's retail brokerage business units, COMMAND, instituted a practice for handling mutual fund paper orders that was inconsistent with the pricing requirements of the Investment Company Act of 1940, which requires that mutual fund orders are priced on the day the order is received prior to 4:00 p.m.
Instead, from late 2003 to June 2011, COMMAND priced more than 850,000 paper orders, on average, one or two days after it received complete orders prior to 4 p.m. The employees mistakenly believed that they could use "best efforts," (i.e. up to two business days) to process mutual fund paper orders and that paper orders could be priced on the date the order was processed, even if Pruco received a complete order prior to that date.
The issue was discovered after an inquiry to COMMAND personnel regarding a fax order submitted had not been executed until the day after it was received as a complete order. As a result of these findings, some 37,000 accounts for 34,000 customers will receive more than $10.7 million in restitution, plus interest. The firm is in the process of calculating restitution for up to 3,240 additional customers.
FINRA also found that Pruco failed to have an adequate supervisory system to detect and prevent the mispricing of paper mutual fund orders and to ensure that customers who submitted paper mutual fund orders received the correct price. Also, FINRA found that Pruco failed to have written procedures for the pricing of mutual fund orders, and did not provide its employees with any training or training materials regarding paper mutual fund pricing requirements.
Pruco neither admitted nor denied the charges but consented to the FINRA's findings.
Brad Bennett, executive vice president and Chief of Enforcement, said: "Pruco's inadequate supervision and pricing system resulted in thousands of customers receiving inferior prices for more than seven years. Broker-dealers must ensure that their systems provide customers with accurate pricing for all products that the firms offer."