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.