FINRA Fines Robert W. Baird & Co. $500,000 for Fee-Based Account, Breakpoint Violations
Firm to Return More Than $434,000 in Fees, Plus Interest, To Customers
Washington, DC. — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Robert W. Baird & Co. $500,000 for supervisory violations relating to its fee-based brokerage business. FINRA also ordered Baird to return $434,510 in fees, plus interest, to 154 customers. Those customers either paid fees in fee-based accounts without generating activity or paid fees higher than those indicated on the Baird fee schedule.
Fee-based brokerage accounts first became available in 1999 as a result of a proposed Securities and Exchange Commission (SEC) rule that exempted brokers from certain elements of the Investment Advisers Act of 1940. In March 2007, a federal court struck down the final version of that SEC rule — and since then, fee-based brokerage accounts have become obsolete. Baird terminated its fee-based brokerage account program — called 360/One accounts - on Sept. 30, 2007.
Typically in fee-based brokerage accounts, customers were charged an annual fee that was usually a percentage of the account's assets with an annual minimum, rather than a commission for each transaction as in a traditional brokerage account. Firms were required to determine whether a fee-based account was appropriate for an investor — and remained appropriate for that investor — based on the projected cost to the investor, available alternative fee structures, the services provided and the investor's fee structure preferences. In most instances, investors who traded frequently benefited from being in a fee-based account, while investors who traded rarely paid less in a traditional brokerage account. Compensation earned by the firm and the broker from a fee-based account was generally not dependent on whether a customer bought or sold securities.
FINRA found that Baird's failure to adequately review its 360/One accounts during a period in which the 360/One program grew from approximately 7,000 accounts to over 11,000 accounts allowed numerous 360/One customers to remain in the program despite conducting no trades for at least eight consecutive quarters. These accounts paid over $269,000 in fees during the inactive quarters (that is, excluding the first four consecutive quarters with no trades).
Baird also failed to have a supervisory system in place to automatically credit certain 360/One customers with breakpoint discounts that were specified in new account agreements. As a result, 53 customers paid fees higher than those indicated on the Baird fee schedule, resulting in total overpayments of approximately $165,000.
In addition, from May 1999 through January 2005, Baird failed to adequately disclose to its fee-based customers that assets held on margin — for which the customer might already be paying interest — and short sales were included as eligible assets for purposes of fee calculation.
In settling this matter, the firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2008, members of the public used this service to conduct 11.6 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
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