|Tuesday, November 4, 2003
Nancy A. Condon
NASD Reminds Securities Firms Fee-Based Accounts Must Be Appropriate
Washington, DC – NASD today reminded securities firms they should have reasonable grounds for believing that a fee-based account is appropriate for a particular customer, in light of various factors such as the customer’s financial status, investment objectives and fee structure preferences.
“While NASD recognizes the benefits of fee-based accounts, it also recognizes that they may not be suitable in all circumstances, for all investors,” said Mary L. Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. “Firms must garner enough information to perform a comprehensive analysis before placing a customer in this type of program.”
Fee-based accounts, including some wrap accounts, typically charge a customer a fixed fee or percentage of assets under management in lieu of transaction-based commissions. NASD-regulated firms increasingly are offering customers fee-based accounts that charge a fixed fee and/or percentage of assets under management as an alternative to traditional commission-based charges for brokerage services. Many of these firms have expanded their fee-based programs to cover traditional brokerage accounts that do not include investment advisory services. Previously, these programs typically involved “wrap” accounts, where broker-dealers provide investors with a suite of services – asset allocation, portfolio management, execution and administration – for a single fee.
In the Notice to Members, NASD reminds firms that before opening a fee-based account for a customer, they need to have reasonable grounds to believe that type of account is appropriate for that particular customer. Customers may have reasons, unrelated to the cost structure fee-based accounts, for deciding to handle their investment services on that basis, but all material components of the fee-based accounts, including the fee schedule, services provided and the fact that the program may cost more or less than paying for the services separately must be disclosed to the customer. Firms that administer fee accounts should make reasonable efforts to obtain information about the customer’s financial status, investment objectives, trading history, size of portfolio, nature of securities held, and account diversification. With that and any other relevant information in hand, firms should then consider whether the type of account is appropriate in light of the services provided, the projected cost to the customer, alternative fees structures that are available, and the customer’s fee structure preferences. In addition, there must be a supervisory system in place to monitor on an ongoing basis whether a fee-based account remains appropriate for a particular customer, and should review their sales literature, marketing material and other correspondence related to fee-based accounts to ensure the information is balanced and not misleading.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business – from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web site at www.nasd.com.