Washington, D.C. — NASD announced today that it has censured and fined Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. $750,000 for violations relating to the firms' fee-based brokerage business. The firms will also pay restitution totaling $138,000.
In a fee-based account, a customer is charged an annual fee that is either fixed or a percentage of the assets in the account, rather than a commission charge for each transaction as in a traditional brokerage account.
"Fee-based accounts can be appropriate for many investors," said NASD Vice Chairman Mary L. Schapiro. "But they are not automatically appropriate for everyone. Firms should not recommend these accounts without first making a determination, by looking at traditional suitability factors as well as the customer's trading history, that the account is appropriate in light of the services provided, the projected cost to the customer, alternative fee structures available and the customer's preference. They also should periodically review these accounts after they are opened to see that they remain appropriate."
NASD found that, from April 2001 through December 2004, the Raymond James firms failed to establish and maintain a supervisory system, including written procedures, reasonably designed to review and monitor their fee-based brokerage business. In addition, the firms also violated NASD rules by recommending and opening fee-based brokerage accounts for customers without first determining whether these accounts were appropriate and by allowing those accounts to remain open.
The Raymond James firms began offering their customers fee-based brokerage accounts in early 2001. Their fee-based account business grew rapidly, increasing from some 8,600 accounts and $1.8 billion in assets at the end of 2001 to more than 27,000 accounts and close to $5.5 billion in assets by the end of August 2004. But NASD found that the Raymond James firms did not implement any supervisory system or written procedures geared toward their fee-based brokerage accounts. Instead, they continued to rely on their existing supervisory system, which was directed towards its commission-based business. The firms never conducted an initial or periodic supervisory review of their customers' fee-based brokerage accounts to determine whether those accounts were appropriate for the particular customers. In addition, the Raymond James firms never monitored their fee-based brokerage accounts for inactivity and improperly allowed certain fee-based accounts to remain open.
NASD also found that the Raymond James firms did not require their brokers to determine whether a fee-based brokerage account was appropriate for a customer before opening the account. As a result, Raymond James' registered representatives recommended and opened fee-based accounts for customers without having reasonable grounds for believing that such accounts were appropriate.
Between early 2001 and December 31, 2003, the Raymond James firms recommended and opened fee-based accounts for approximately 2,913 existing customers who had commission-based accounts for more than one year without executing a trade in the account. Based on the customers' trading history, Raymond James should have known these customers were "buy and hold" customers and that fee-based accounts may not have been appropriate for them. Of these 2,913 customers, 190 never executed a trade in their fee-based accounts, yet they paid Raymond James total fees of approximately $138,000. Those customers will be receiving restitution under the settlement announced today.
NASD's disciplinary action describes three specific examples of customers for whom the firm inappropriately recommended and opened fee-based accounts:
- Customer WH opened a traditional commission-based account in 1993. Between 1993 and 2001, WH never engaged in any securities transactions in the account. In 2001, WH's account, valued in excess of $420,000, was converted into a fee-based account. Through the end of 2003, WH never engaged in any securities transactions in the fee-based account, but paid total fees of approximately $6,000.
- Customer IS opened a commission-based account in 1984. The only transactions in the account occurred between July 1996 and January 1997, when IS purchased nine securities, totaling $47,650. In 2001, IS's account, valued in excess of $70,000, was converted into a fee-based account. Before IS's fee-based account was closed in 2003, the account generated approximately $2,546 in fees to the firm, without IS making any trades in the account.
- Customer RW opened a commission-based IRA account in 1988. The only transactions in the account occurred in 1998, when RW purchased a small amount of stock. RW made no trades in the account after 1998. In 2001, RW's account, valued in excess of $160,000, was converted into a fee-based account. RW did not make any trades in his fee-based account before he converted it in 2003 back to a commission-based account. During the time the fee-based account remained open, it generated approximately $3,780 in fees to the firm.
In addition, NASD found that more than 13 percent of the customers in Raymond James' Passport Brokerage accounts - the firms' primary fee-based brokerage account - made no trades in their accounts in 2001. The percentage of Passport Brokerage accounts that made no trades increased to 14.2% in 2002 and 16.6% in 2003. Yet Raymond James did not conduct any supervisory review or monitoring of these accounts to determine whether they were, or continued to be, appropriate for the customers.
Raymond James also was found to have used advertising and sales literature that emphasized the benefits of fee-based accounts without adequately discussing the fees and restrictions associated with those accounts. NASD further found that some of the advertising and sales literature pieces were inaccurate and misleading.
The firms have notified NASD that they are in the process of terminating their fee-based brokerage programs and will completely discontinue their fee-based brokerage business by July 1, 2005. As part of the sanctions imposed by NASD - in the event that either of the Raymond James firms involved in today's action continues with any fee-based brokerage business after July 1, 2005 - the firm must retain an independent consultant to make recommendations regarding establishing, maintaining and enforcing a supervisory system and written procedures relating to its fee-based brokerage business that are designed to achieve compliance with applicable securities laws and NASD Rules.
In settling these matters, the firms neither admitted nor denied the charges, but consented to the entry of NASD's findings.
In November 2003, NASD issued Notice to Members 03-68, reminding firms that before opening a fee-based account they must have "reasonable grounds for believing that a fee-based program is appropriate for that particular customer" - taking into account the services provided, the projected cost to the customer, alternative fee structures available and the customer's fee structure preferences. In that notice, firms were also reminded that after a fee-based account has been opened, firms should implement procedures requiring a periodic review to determine whether the fee-based account remains appropriate for each of their customers.
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 to the public. In 2004, members of the public used this service to conduct more than 3.8 million searches for existing brokers or firms and requested more than 190,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
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