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- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
A “wide disparity” exists among broker-dealers in how they disclose fees, and BDs are also using “questionable practices” in relation to fee charges and markups, according to a survey released Thursday by the North American Securities Administrators Association.
The state regulators found fee-disclosure documents ranging from one to 45 pages.
The survey, performed by NASAA’s Broker-Dealer Investment Products and Services Project Group, found that while BDs may be complying with “technical requirements” for fee disclosures, the firms’ “disclosures lose effectiveness when hidden in small print, imbedded in lengthy account opening documents, or varied in terminology that does not define the service provided.”
Broker-dealer customers, the survey concluded, “would benefit from greater consistency and transparency in the disclosure of fees,” and thus the group recommended that NASAA establish a task force “to work with industry in standardizing the language, placement and structure of fee disclosures similar to the approach taken in the banking industry.”
The group also recommended that NASAA work with the industry and the Financial Industry Regulatory Authority to adopt “model fee disclosures” that will provide investors with greater consistency and transparency as envisioned in FINRA Rule 2010 and “work with these same parties to holistically review broker-dealer markups to ensure investors are not charged unreasonable fees in violation of NASD Conduct Rule 2430.”
FINRA said in a statement to ThinkAdvisor that as NASAA notes in its survey report, "FINRA has been focused on disclosure of fees in retail brokerage accounts and individual retirement accounts for some time, and issued guidance as recently as last year." In addition, FINRA said that it is "currently in the process of revising its rules on fees and markups," and that "FINRA welcomes the opportunity to continue working on these issues with our fellow regulators to find ways to improve disclosures for investors."
Andrea Seidt, NASAA president and Ohio securities commissioner, noted in a statement that the report “raises concerns regarding the transparency and reasonableness of broker-dealer fee practices.” She added that state regulators “will be examining these issues more closely, but welcome the opportunity to work with industry to ensure that fees are reasonable and fairly disclosed to investors.”
NASAA’s survey was prompted by fines levied by the Connecticut Banking Department’s Securities and Business Investments Division in 2010 and 2011 against several broker-dealers for what were characterized on customer statements as “miscellaneous” charges and postage handling charges. These charges, however, concealed markups or profits for the broker-dealer.
FINRA also took action in 2011 against five broker-dealers for excessive postage and handling charges.
NASAA’s Broker-Dealer Investment Products and Services Project Group decided in the spring of 2012 to conduct its own survey of fee disclosures and types of fees charged by broker-dealers. The group members each surveyed five to nine broker-dealers (small, large, full service and retail) within their region.
While the survey consisted of a number of questions for purposes of its report released Thursday, the Project Group said that it narrowed its focus to two issues: fee disclosures and transfer fees.
The NASAA group provided an example of a BD that charged customers $500 to receive their securities in certificate form. However, the broker-dealer’s clearing firm only charged the BD $60 for the certificate, so the BD was charging a $440 markup, more than six times the certificate cost to the broker-dealer.
In the outgoing transfer fee context, the report states that “markups were routinely in the 100% to 280% range.”
The report then cites NASD Conduct Rule 2430, which states that the fees imposed by broker-dealers on customer accounts must be reasonable for the services performed. Fees that are not reasonably related to services, or that are excessive, may violate state laws and FINRA rules.
The report found that initial fees disclosed by the BDs varied. The surveyed broker-dealers provided the fee disclosures on or with account statements, in separate booklets or mailings, on their websites, or in new account agreements. Most of the surveyed BDs presented the fees in a chart format; however, some used a narrative format. The fee disclosures were typically one-to-two pages in length, but in some cases the disclosures were five to seven pages.
As to disclosing fee changes, most of the surveyed broker-dealers indicated that fee changes are disclosed to customers at least 30 days in advance. The location of the fee change disclosures varied, with the surveyed broker-dealers providing fee changes on or with account statements, in separate mailings, or on their websites.
As to where a client might be able to find fee information, the NASAA group found that disclosures pertaining to fees ranged between a paragraph and seven pages in length. “The actual fee disclosure verbiage itself was sometimes buried within a document having an overall length of between one and 45 pages,” the report states.