NASD Fines Raymond James $750,000 For Fee-Based Account Violations

NASD has censured and fined Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. $750,000 for violations relating to the firms' fee based brokerage business. The firms will also pay restitution totaling $138,000. In a fee based account,

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NASD has censured and fined Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. $750,000 for violations relating to the firms’ fee- based brokerage business. The firms will also pay restitution totaling $138,000.

In a fee-based account, a customer is charged an annual fee that is either fixed or a percentage of the assets in the account, rather than a commission charge for each transaction as in a traditional brokerage account.

“Fee-based accounts can be appropriate for many investors,” said NASD Vice Chairman Mary L. Schapiro. “But they are not automatically appropriate for everyone. Firms should not recommend these accounts without first making a determination, by looking at traditional suitability factors as well as the customer’s trading history, that the account is appropriate in light of the services provided, the projected cost to the customer, alternative fee structures available and the customer’s preference. They also should periodically review these accounts after they are opened to see that they remain appropriate.”

NASD found that, from April 2001 through December 2004, the Raymond James firms failed to establish and maintain a supervisory system, including written procedures, reasonably designed to review and monitor their fee-based brokerage business. In addition, the firms also violated NASD rules by recommending and opening fee-based brokerage accounts for customers without first determining whether these accounts were

appropriate and by allowing those accounts to remain open.

The Raymond James firms began offering their customers fee-based brokerage accounts in early 2001. Their fee-based account business grew rapidly, increasing from some 8,600 accounts and $1.8 billion in assets at the end of 2001 to more than 27,000 accounts and close to $5.5 billion in assets by the end of August 2004. But NASD found that the Raymond James firms did not implement any supervisory system or written procedures geared toward their fee-based brokerage accounts. Instead, they continued to rely on their existing supervisory system, which was directed towards its commission-based business. The firms never conducted an initial or periodic supervisory review of their customers’ fee-based brokerage accounts to determine whether those accounts were appropriate for the particular customers. In addition, the Raymond James firms never monitored their fee-based brokerage accounts for inactivity and improperly allowed certain fee-based accounts to remain open.

NASD also found that the Raymond James firms did not require their brokers to determine whether a fee-based brokerage account was appropriate for a customer before opening the account. As a result, Raymond James’ registered representatives recommended and opened fee-based accounts for customers without having reasonable grounds for believing that such accounts were appropriate.

Between early 2001 and December 31, 2003, the Raymond James firms recommended and opened fee-based accounts for approximately 2,913 existing customers who had commission-based accounts for more than one year without executing a trade in the account. Based on the customers’ trading history, Raymond James should have known these customers were “buy and hold” customers and that fee-based accounts may not have been appropriate for them. Of these 2,913 customers, 190 never executed a trade in their fee-based accounts, yet they paid Raymond James total fees of approximately $138,000. Those customers will be receiving restitution under the settlement.

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