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Regulation and Compliance > Federal Regulation > SEC

Raymond James Units Fined

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The regional brokerage and independent broker/dealer units of Raymond James Financial Inc. have been slapped with a $750,000 fine and ordered to pay $138,000 back to clients as part of a settlement with NASD of charges that firms had violated the self-regulatory organization’s rules for offering fee-based brokerage accounts.

In the wake of the settlement, announced April 27, both units will end the Passport fee-based brokerage account program, which was launched at St. Petersburg, Florida-based Raymond James in 2001 and had grown to some $5.5 billion in assets by August 2004. According to the parent company, both units are now asking holders of 27,000 fee-based brokerage accounts whether they would like to switch back to commission-based accounts or move to fee-based advisory accounts, which are held to stricter fiduciary standards. “The primary service in an advisory account is providing advice, which is squarely what the Raymond James business model is,” said Mark Barracca, associate corporate counsel for Raymond James Financial. He said he expects the switch would be completed by July 1.

In settling with NASD, the Raymond James units neither admitted nor denied the charges. Barracca said that Raymond James disagrees with the NASD’s view that because any advice provided in a fee-based brokerage account is incidental, the primary value of such an account is cheap trading. But fee-based brokerage accounts have been a contentious matter since the Financial Planning Association sued the Securities & Exchange Commission last year in a bid to get the agency to determine whether brokers should be able to offer advice as part of these relationships.

While the SEC recently ruled that the brokers could continue offering these accounts, it also ordered better disclosure and launched a 90-day study of the issue. The FPA on April 28 said it was suing the SEC over the decision. Barracca said that because the SEC’s latest ruling leaves room for interpretation of what constitutes advice in a brokerage account, the firm decided not to try to outguess regulators and instead would end the Passport program. “NASD did not ask us to terminate” the program,” he said, adding that “we made a business decision” to do so, based on “the regulatory costs of compliance.”

The Raymond James case centered on whether its fee-based brokerage accounts were the proper alternative to traditional commission-based accounts for clients who did little trading. NASD charged that both of the firm’s units had violated the regulator’s rules by recommending that customers open the fee-based brokerage accounts without determining whether they were appropriate. Regulators cited three cases in which customers were switched to new accounts relationships that generated between $2,500 and $6,000 in fees although few trades were made. NASD maintained that among customers with Passport accounts, about 13% made no trades at all in 2001, 14.2% did not trade the following year, and 16.6% had no activity in 2003.

“Fee-based accounts can be appropriate for some investors,” said NASD Vice-chairman Mary Schapiro, “but they are not automatically appropriate for everyone.” According to NASD, the two Raymond James arms failed to review or monitor accounts to see if they were appropriate for the clients. NASD also alleged that the firms used inaccurate and misleading advertising and failed to properly disclose the accounts’ fees and restrictions.


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