Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined AXA Advisors, LLC, $1.2 million for failing to adequately supervise its fee-based brokerage business and distributing misleading sales literature for its fee-based brokerage account program, CapAdvantage, between 2001 and 2005.
FINRA also ordered AXA Advisors to return $1.4 million in fees to approximately 1,800 customers who were inappropriately placed or kept in fee-based brokerage accounts. The firm is voluntarily refunding customers an additional $1.2 million, making the total amount returned to CapAdvantage customers more than $2.6 million. AXA Advisors also unilaterally took steps to enhance its system and procedures and to close accounts that were not appropriate for CapAdvantage. FINRA considered these steps taken by AXA Advisors in determining the sanctions in this case.
"When a firm offers a new service to customers, such as a fee-based brokerage account, it must tailor its supervisory systems to the newly offered product," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. "AXA Advisors failed to put in place supervisory systems designed to ensure that its CapAdvantage fee-based account was appropriate for the customers it placed in the program. The firm also provided inaccurate information to brokers and customers about how fees would be assessed in these accounts."
In fee-based brokerage accounts, customers are charged an annual fee that is usually a percentage of the assets in the account with an annual minimum, rather than a commission for each transaction as in a traditional brokerage account. As a result, the compensation earned by the firm and the broker is generally not dependent on whether a customer buys or sells securities. These 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 of this year, a federal court struck down the final version of that SEC rule.
FINRA found that during the period when AXA Advisors developed CapAdvantage, prior to its 2001 launch, the firm was aware that fee-based brokerage accounts raised new supervisory and compliance issues. AXA Advisors designed the product for investors with a minimum balance of $50,000 and who were not "buy-and-hold" investors, but who would engage in at least some trading. While the firm instructed its brokers that low balance accounts, infrequently traded accounts, and several other classes of accounts required close monitoring, it failed to adequately supervise for these issues.
FINRA found that the firm's system and procedures were not reasonably designed to determine whether the program initially was, or remained, appropriate for customers opening CapAdvantage accounts. One result of this was that AXA Advisors allowed many investors with less than $50,000 in assets to open CapAdvantage accounts. For example, one customer opened a fee-based account with just $2,000 and AXA Advisors assessed fees until the account was depleted of all funds. The firm also allowed numerous customers to maintain accounts in the program and pay for those accounts even though they did no trading for years. For example, one customer maintained an average account balance of more than $3.5 million, but did no trades from 2002 through 2004. Yet, during that period, the firm deducted approximately $73,000 in asset-based fees.
It took AXA Advisors almost three years after introducing CapAdvantage to generate exception reports targeting its fee-based brokerage accounts. FINRA found that even after the creation of these reports, the firm did not have adequate follow-up. This was particularly egregious because approximately half of all CapAdvantage accounts appeared on an exception report that highlighted some of these issues.
In addition, FINRA found that AXA Advisors used written internal and external communications that were misleading. The firm told brokers and clients that CapAdvantage accounts would not be charged asset-based fees until the account reached $50,000. While this accurately reflected the firm's initial intention, it did not reflect how fees were actually charged. In fact, over 1,500 customers were charged fees before reaching the "minimum" account level.
The firm's communications also asserted that a benefit of CapAdvantage was that the interests of the client and the broker were aligned, because the broker's compensation was not linked to the number of transactions in the account. However, the firm required brokers to partially absorb ticket charges, so brokers made less money with each transaction, creating a potential conflict of interest between the broker and the client, particularly for clients with the least assets in these accounts.
Under the terms of the settlement announced today, customers who will receive refunds either did no trades for two years, or had less than the required minimum account balance for a year and were charged fees, or were charged fees prior to reaching the asset level that the firm said would trigger asset-based fees. Of the refunds ordered by FINRA, approximately $812,000 is being returned to 1,500 small account holders who were allowed to open a fee-based brokerage account with less than the required $50,000 minimum.
In settling this matter, the firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
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FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. Created in 2007 through the consolidation of NASD and NYSE Member Regulation, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business - from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms.
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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 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.finra.org/brokercheck. Investors can also access this service by calling (800) 289-9999.