Firm Also Required to Certify Voluntary Refunds of $713,362 to Customers
Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined SunTrust Investment Services, Inc., $700,000 for supervisory violations relating to its fee-based brokerage business and to commissions on certain low-priced stocks. In assessing the fine announced today, FINRA took into account SunTrust's voluntary refunding of more than $713,000 in fees and interest to affected accountholders.
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 Advisors Act of 1940. In March 2007, a federal court struck down the final version of that SEC rule - and since then, fee-based accounts have become obsolete. SunTrust terminated its fee-based accounts - called Portfolio Choice accounts - on Dec. 31, 2006.
Typically in fee-based brokerage accounts, customers were charged an annual fee that was 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. Firms were required to determine whether a fee-based account was appropriate for an investor based on the projected cost to the investor, whether alternative fee structures were available, the services provided and the investor's fee structure preferences. Compensation earned by the firm and the broker from fee-based accounts was generally not dependent on whether a customer bought or sold securities.
"Firms that offered fee-based brokerage services had an obligation to do so using supervisory systems that were specifically designed for such business activities," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. "SunTrust's former program was yet another example of a firm that failed to put in place supervisory systems designed to ensure that its fee-based account was appropriate for the customers it placed in the program. In addition, SunTrust also failed to monitor these accounts to ensure that they remained appropriate for the customers who opened them."
FINRA found that during the period from November 2002 through December 2005, SunTrust opened over 2,644 Portfolio Choice accounts without adequately assessing whether the accounts were appropriate for its customers. SunTrust further failed to adequately monitor the activity in the Portfolio Choice accounts to ensure that they remained appropriate for its customers. FINRA identified at least 36 Portfolio Choice accounts that conducted no trades for at least eight consecutive quarters -- and those 36 accounts were charged over $129,000 in fees during the last four inactive quarters.
In addition, certain Portfolio Choice accountholders paid both a commission on transactions and an asset-based fee on those same assets. In more than 900 instances, SunTrust erroneously failed to exclude a customer asset purchased with a commission from the asset base used to calculate the account fee. In these cases, the customers were double- charged, as they paid both a commission on the transaction as well as an ongoing fee on the asset. The double charges resulted in approximately $437,500 in excess fees and/or commissions paid by SunTrust customers.
FINRA also found that SunTrust inappropriately allowed numerous customers to maintain accounts in the program and to pay for those accounts even though they had not traded in years. For example, in December 2003 one customer transferred to SunTrust an account in which there had been no trading activity for almost two years and set up a Portfolio Choice fee-based account. There was no trading activity in this account through March 2006, yet during that period the firm charged the account approximately $8,170 in asset-based fees. In another example, a customer transferred an IRA account to SunTrust in November 2003. This account was set up as a Portfolio Choice fee-based account. From November 2003 through January 2006, the account had no trading activity, but the customer was charged $8,672 in fees from its inception until March 2006.
During the period from Jan. 1, 2002 through Sept. 2, 2005, SunTrust also failed to establish a supervisory system, including written procedures, reasonably designed to ensure that its registered representatives charged its customers fair and reasonable commissions on securities transactions. SunTrust employed an automated commission system that allowed commissions over five percent to be charged when low-priced and/or low quantities of stocks were bought or sold. As a result, certain customers were charged excess commissions totaling nearly $100,000.
In settling this matter, the firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings. Under the terms of the settlement, SunTrust agreed to certify to FINRA that it has refunded $713,362 in fees and interest to affected accountholders.
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 2007, members of the public used this service to conduct 6.7 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. 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 all industry participants to examining securities firms; writing and enforcing 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. For more information, please visit our Web site at www.finra.org.