- Investment advisers should adopt and adhere to policies and procedures reasonably designed to prevent any transaction, practice or course of business that would enable a fraudulent or deceitful action on a client or potential client.
- Brokerage firms must have a reasonable basis for recommending unit investment trust transactions to customers and disclose potential conflicts of interest.
The Securities and Exchange Commission (SEC) issued an order against an advisory firm after an investigation revealed the firm had improperly charged advisory fees on inactive retail client accounts and charged excess commissions for brokerage customer investments in certain unit investment trusts (UITs).
Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 (Advisers Act) prohibit advisers from engaging in fraudulent and deceitful transactions or courses of business with their clients, and Rule 206(4)-7 requires investment advisers to adopt and implement policies designed to prevent such activity. From January 2013 through September 2017, Raymond James & Associates, Inc. and Raymond James Financial Services Advisors, Inc. (collectively Raymond James Advisers) maintained a compliance policy that required the firm to review client advisory accounts regularly to determine if they remained suitable or should be moved to brokerage accounts. The policy mandated that Raymond James Advisers assess accounts that had been inactive for a 12-month period to determine whether the clients received sufficient investment advisory services to justify remaining in fee-based advisory accounts.
Yet Raymond James Advisers allegedly failed to review over 7,700 accounts that had no securities trading activity for at least 12 months while collecting approximately $4.9 million in fees from these accounts. The firm lacked reasonably designed policies to alert compliance personnel of the missed reviews or that imposed deadlines for their completion. During this same period, Raymond James Advisers also supposedly charged excess fees to some clients after overvaluing the assets in their accounts.
Section 15(a) of the Securities Act of 1933 (Securities Act) prohibits the offer or sale of securities by means of any untrue statement or omission of material fact or a fraudulent or deceitful transaction or course of business. From June 2013 through May 2018, Raymond James Financial Services, Inc. and Raymond James Financial Services Advisors, Inc. (collectively Raymond James Brokers) recommended that customers liquidate UITs before their maturity dates and purchase newly issued UITs (a “short-hold transaction”) as part of a buy-and-hold strategy to enhance investment returns. However, Raymond James Brokers self-reported that it failed to consider the effect of sales charges and other transaction costs associated with frequent short-hold transactions on overall investment returns. The firm also collected commissions on these transactions after falsely implying that it had a reasonable basis for its recommendations.
At the same time, Raymond James Brokers relied on a software program to determine whether certain brokerage customers were eligible for discounts but failed to review those determinations to ensure the program properly identified the eligible accounts and correctly applied the discounts. The firm received additional compensation from customers who did not receive the proper discounts without disclosing this conflict of interest.
The SEC investigated these alleged actions and omissions and found that the conduct of Raymond James Advisers and Raymond James Brokers had willfully violated the Advisers Act and the Securities Act, respectively. It determined that Raymond James Advisers had violated the Advisers Act by not reviewing its inactive accounts while collecting fees on the accounts and by failing to implement reasonably designed policies and procedures for reviewing those accounts. It also found that Raymond James Brokers’ UIT recommendations omitted material facts and were therefore misleading in violation of the Securities Act.
The SEC noted that courts have found a “willful” violation when an actor was aware of what he or she was doing, even though the actor had no intention of violating any rules or statutes. It further observed that courts have held that negligence could establish a violation of the Advisers Act or Securities Act.
In response to the investigation, Raymond James Advisers and Raymond James Brokers undertook several remedial efforts and cooperated fully with the SEC. In addition to censuring the firms and ordering them to cease and desist from committing further violations, the SEC ordered disgorgement, prejudgment interest and a civil monetary penalty totaling over $15 million.
Advisers and brokers must be mindful of the regulations governing their ongoing obligations to avoid any practice or course of dealing that operates as a fraud or deceit upon a client or prospective client. They must have written policies and procedures designed to prevent such transactions, and they should review compliance with these policies and procedures regularly.