finra

FINRA

 

For Release:
Contacts:
Thursday, June 21, 2007
Nancy Condon (202) 728-8379
Herb Perone (202) 728-8464

 


 

NASD Fines Wachovia Securities $2 Million for Fee-Based Account Violations

Washington, D.C. — NASD announced today that it has fined Wachovia Securities LLC of Richmond, VA, $2 million for failing to adequately supervise its fee-based brokerage business between 2001 through 2004.

In addition, NASD ordered Wachovia to identify and pay restitution to approximately 1,300 customers who were inappropriately allowed to continue maintaining fee-based accounts, or who were inappropriately charged account fees on Class A mutual fund share holdings for which they had already paid a sales load.

The firm also is required to retain an outside consultant to review its process of identifying and paying restitution to customers.

"Firms must have systems and procedures which are tailored to reasonably supervise their business activities," said NASD James Shorris, Executive Vice President and Head of Enforcement. "In the case of fee-based accounts, firms had an obligation to their customers to assess the appropriateness of such accounts both when the accounts were opened and periodically thereafter. Here, Wachovia failed to implement a system designed to ensure that an assessment of the appropriateness of the fee-based account occurred. This failure was compounded by the firm's failure to prevent certain fee-based customers from being charged both an account fee and a sales charge for the same mutual fund investments."

In fee-based brokerage accounts, customers are charged an annual fee that is either fixed or a percentage of the assets in the account, rather than a commission for each transaction, as in a traditional brokerage account. These accounts first became available in 1999 as a result of a proposed Securities and Exchange Commission (SEC) rule that exempted stockbrokers from certain elements of the Investment Advisers Act of 1940. In March, a federal court struck down the final version of that SEC rule.

Wachovia began offering a fee-based brokerage account, now called "Pilot Plus," to its customers in 1999. In 2001, Wachovia had just over 18,000 Pilot Plus customers who paid more than $55 million in Pilot Plus fees. By the end of 2004, that number had grown to more than 41,000 customers who paid more than $110 million in Pilot Plus fees.

NASD found that during 2001 through 2004, Wachovia failed to establish and maintain an adequate supervisory system, including written procedures, reasonably designed to review and monitor its Pilot Plus accounts. While the firm informed its brokers that a Pilot Plus account was not appropriate for customers who made a limited number of trades, buy-and-hold customers, and customers with assets below $50,000, Wachovia failed to put in place a system and procedures reasonably designed to determine whether Pilot Plus accounts were appropriate for its customers.

NASD's investigation revealed that 594 Wachovia customers, who conducted no trades in their Pilot Plus accounts for at least two consecutive years, paid the firm approximately $1.9 million in fees. Also, 620 Pilot Plus customers held assets of less than $25,000 for at least one full year and paid at least the minimum annual fee of $1,000. This fee represented twice the firm's stated top rate of 2 percent allowed under the Pilot Plus agreement. During the time that these customers' eligible assets averaged below $25,000 for at least one full year, they paid a total of approximately $1 million in Pilot Plus fees. All of these customers will be entitled to restitution under the settlement.

In addition, Wachovia failed to reasonably enforce its written procedures designed to protect Pilot Plus customers from being assessed both an initial sales charge and an on-going asset-based fee on the purchases of Class A shares of mutual funds. Ordinarily, when a customer purchases Class A shares of a mutual fund, the customer pays a front end sales charge or "load" at the time of purchase. Under Wachovia's procedures, customers who purchased Class A shares outside of a Pilot Plus account and paid a front end sales charge on the purchase were not allowed to transfer those shares into a Pilot Plus account for at least 13 months so as to avoid duplicative charges for the fund shares. But Wachovia failed to enforce these procedures. Consequently, Wachovia charged more than 110 customers both a load and Pilot Plus fees on the purchase of Class A shares of mutual funds. These customers also will receive restitution pursuant to the settlement.

NASD also found that Wachovia failed to adequately supervise certain high revenue-producing brokers, who were members of the firm's "Red Carpet Club." The Red Carpet Club members were exempted from some of the firm's review and approval processes. Whereas most Pilot Plus accounts were opened only after review and approval by both a branch manager and a representative from the unit responsible for the oversight of all of the firm's fee-based programs, only branch manager approval was required for customers of Red Carpet Club members. This less vigorous review resulted in Red Carpet Club members opening Pilot Plus accounts for customers with total assets which were below the firm's stated $50,000 minimum account balance. This resulted in Red Carpet Club members' customers constituting approximately 99 percent of those accounts in Pilot Plus that held less than $25,000 in assets for at least one full year.

Additionally, two brokers, who were recruited from another firm and immediately became Red Carpet Club members, brought more than 340 of their customers to Wachovia and opened Pilot Plus accounts for them. In recommending Pilot Plus accounts to these customers, the two brokers incorrectly told them that Pilot Plus was an advisory account rather than a fee-based brokerage account. Wachovia failed to adequately supervise these brokers' communications with their customers. Moreover, once the firm discovered that these brokers had incorrectly described Pilot Plus as an advisory account, it failed to respond in a timely manner to correct the inaccurate representations made to these customers.

NASD also determined that Wachovia violated NASD rules governing communications with the public by providing its brokers with an optional letter they could send to customers which inaccurately stated at one point that Pilot Plus was "a fee-based, investment advisory service." In fact, Pilot Plus was not an advisory service or advisory account, which would be subject to a different regulatory regime, but was in fact a fee-based brokerage account.

 

In settling this matter, the firm neither admitted nor denied the charges, but consented to the entry of NASD's findings.

Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge. In 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasd.com/brokercheck. Investors can also access this service by calling (800) 289-9999.

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 registered firms. For more information, please visit our Web site at www.nasd.com.