Edward Jones, a broker-dealer registered with the Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority, agreed to pay a fine of US $150,000 to resolve charges that it failed to correctly aggregate related accounts of some of its customers to apply a discounted rate for margin loans available to larger accounts. According to FINRA, beginning in January 2014, Edward Jones based rates for margin loans on the total value in a customers’ “relationship pricing group”; this included the customer’s accounts and those of related parties. Typically the more assets in a customer’s relationship pricing group, the lower margin loan rate it would be charged. However, claimed FINRA, Edward Jones’s computer system only aggregated accounts that were mailed together to determine members of a relationship-pricing group, as opposed to accounts that were more broadly related. As a result, charged FINRA, from January 2014 through January 2016, 6,127 owners or accounts were overcharged US $708,000 – although the firm has since reimbursed this amount plus interest to the affected customers. FINRA claimed that this error by Edward Jones resulted from a failure of supervision in that the firm did “not test its automated system for grouping accounts for the assignment of interest rates on margin loans,” among other reasons. Edward Jones did not admit or deny FINRA’s findings in agreeing to its settlement.

My View: The Commodity Futures Trading Commission recently brought and settled a case grounded on a failure to supervise theory against JP Morgan Securities, a Commission-registered futures commission merchant, claiming that the firm failed to “diligently” supervise its staff when the firm did not remit exchange fee rebates totaling US $7.8 million to relevant customers from 2010 to 2014. The CFTC claimed this was because the firm did not have, during the relevant time, automated systems to reconcile its exchange and clearing fees and utilized solely one employee to perform its fee reconciliation process. (Click here for further details regarding this enforcement action in the article “FCM Agrees to Settle With CFTC Related to Purported Exchange Fees Overcharges” in the January 16, 2017 edition of Bridging the Week.) Unlike FINRA’s charges against Edward Jones that derived from the firm’s alleged misapplication of its own rules and failure to catch its own mistake, the CFTC’s charges against JP Morgan related to the assessment of exchange and clearing fees that the CFTC conceded were “typically complicated because of the myriad applicable rates, surcharges and fee structures.” The CFTC said that JP Morgan’s failure to supervise derived from its purported failure to catch its error through a reconciliation process. This seems like quite a stretch, but in any case, rather than bring enforcement actions against FCMs for managing the best they can with a very broken process, the CFTC should encourage exchanges to institute less complicated fee and discount structures and implement tools to help firms conduct reconciliations more easily and reliably.