Ladenburg Thalmann Agrees to Repay $1.2 Million to Customers Overcharged in Proceeds Transactions
Washington, DC - NASD today announced that Ladenburg Thalmann & Co. of New York, NY has agreed to refund $1.2 million, plus interest, to customers who were overcharged in "proceeds transactions" - transactions in which a customer sells securities through a broker and uses the proceeds to pay for other securities purchased at or about the same time.
NASD also fined Ladenburg $275,000 and required the firm to retain an independent consultant to make recommendations for ensuring compliance with NASD's Proceeds Rule.
NASD found that, between May 2001 and May 2004, Ladenburg violated NASD's Proceeds Rule and the federal securities laws by charging more than 3,300 customer accounts excessive commissions on more than 5,300 proceeds transactions, resulting in overcharges totaling $1.2 million.
"As this case demonstrates, firms need to carefully monitor commission charges when a customer is using some or all of the proceeds from a sale to purchase another stock," said NASD Vice Chairman Mary Schapiro. "In this case, Ladenburg's systems fell far short of the mark."
NASD's Proceeds Rule requires that if a customer sells securities through a broker and uses the proceeds to pay for other securities purchased at or about the same time, the broker must calculate his commission in the same way as if the customer had purchased for cash. The rule also limits the aggregate commissions for a proceeds transaction to no more than five percent of the amount reinvested, except in special circumstances.
NASD found that Ladenburg misinterpreted the Proceeds Rule to apply only to same-day transactions. The firm established its internal controls to monitor only for same-day sell-and-reinvestment trades, a fact that was communicated to the firm's registered representatives. Ladenburg's written supervisory procedures failed to mention the Proceeds Rule, explain a proceeds transaction, or explain how the commission on a proceeds transaction should be calculated.
In the more than 5,300 transactions at issue, the firm's brokers solicited the customers to sell and buy securities. NASD found that, in every one of those transactions, the customer's sale and subsequent buy transactions occurred one day apart. Because the transactions did not occur on the same day, Ladenburg's internal controls did not identify them as proceeds transactions and did not cap the commissions at five percent. Instead, Ladenburg collected commissions on the sale and subsequent purchase that exceeded the cap in each of the transactions.
NASD found that in some instances where the broker solicited both transactions together, the customer agreed to the sell transactions but told the broker he would call back the next day with respect to the subsequent purchase. In other instances, the broker solicited both transactions together but recommended that the customer wait to reinvest the proceeds until the market declined, and the customer agreed. Occasionally, the broker solicited the sell transaction and told the customer he would call back the next day with a specific buy recommendation. But in every case, Ladenburg's brokers failed to disclose to their customers that they might pay higher commissions - and therefore a potentially higher overall price for the security - by waiting a day to reinvest the proceeds from their stock sale.
In addition, NASD found that Ladenburg failed to establish and maintain an adequate supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with the Proceeds Rule and required Ladenburg to retain an independent consultant to review and make recommendations concerning the adequacy of Ladenburg's current policies and procedures relating to the firm's compliance with NASD's Proceeds Rule.
In settling these matters, the Ladenburg neither admitted nor denied the charges, but consented to the entry of NASD's findings.
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