Unlike most situations where the SEC finds financial advisory firms have been executing trades in client accounts in order to generate commissions, Raymond James was fined, in part, for charging fees in accounts where no activity had occurred in more than a year. Fiduciaries must review active accounts frequently – at least annually – and proper documentation of account activity must be made.
In this specific case, the SEC found that from 2013 - 2017, RJ Advisers failed to properly review 7,708 advisory accounts after they had no securities trading activity for at least 12 months as required by its policies and procedures. During that time, the inactive accounts in question paid RJ Advisers approximately $4.9 million in advisory fees.
Raymond James could have avoided SEC penalties altogether had policies and procedures already in place been followed. The SEC has been taking a hard look at financial advisory firms' books and records to evaluate how often client accounts are reviewed regarding investment suitability.
It’s not unusual for an advisory firm not to make any trades in an active account for at least some part of the year if the client has not had a change in investment goals and no rebalancing is deemed necessary to achieve proper diversification. Should that happen, it’s essential that records be kept as to the reasons for the inactivity in the account and proper monitoring and management of client assets must be performed to justify any related fees.
Lack of Documentation
Conversely, the SEC also cited a lack of documentation of the investment suitability in active client accounts by a separate Raymond James entity. In particular, RJ Brokers did not have a reasonable basis for recommending that certain brokerage customers sell particular UIT positions prior to their maturity dates to then repurchase newly issued UIT positions; such activity, generated approximately $5.5 million in excess sales charges and affected 2,044 brokerage accounts.
Moreover, RJ Brokers failed to disclose their inherent conflict of interest by recommending UITs without applying almost $660,000 in applicable sales-load discounts to brokerage customers in 5,468 eligible accounts.
Adopting Best Practices
In simple terms, there’s no substitute for proper documentation. Your supporting rationale for any activity or lack thereof in a client account need not be robust, but is essential, particularly when policies and procedures require review of client accounts on a periodic, active basis.
Action Step: Review appropriate policies and procedures to understand your firm's requirements for review of active accounts and the requirements for documenting investment suitability for client accounts.
Not sure what to do? Our experienced team at JLG can help you determine the best way forward in drafting these protocols and more. For more information, please contact us here.
- Managing Partner and CEO
Michelle L. Jacko, Esq. is the Managing Partner and CEO of Jacko Law Group, PC, which offers corporate and securities legal services to broker-dealers, investment advisers, investment companies, hedge/private funds and ...
Add a comment
- Internal Control Failures Cost MetLife $10 million in SEC Settlement
- SEC Proposes Updated Definition of Accredited Investor, Qualified Institutional Buyer
- How to Avoid Legal Problems and Foster a Culture of Regulatory Compliance
- Inside the SEC’s Proposed New Rules for Financial Advisor Advertising
- A Costly Failure to Follow Written Policies and Procedures
- California Governor Signs CCPA Amendments, Privacy Related Bills into Law
- SEC Proposes Exemptions to Application Procedures
- SEC Requests Proposals to Innovate Markets for Thinly Traded Securities
- PricewaterhouseCoopers LLP pays $7.9 to Settle SEC Improper Professional Conduct, Auditor Independence Charges
- HCR Advisors Settles SEC Charges on Failure to Supervise and Implement Compliance-Related Policies and Procedures
- Securities and Exchange Commission (SEC)
- Due Diligence
- Investment Advisers
- Advisers Act
- Policies and Procedures
- Securities Law
- Office of Compliance Inspections and Examinations (OCIE)
- Ponzi Scheme
- California Consumer Privacy Act (CCPA)
- Aging Clients
- Form U5
- Virtual Currency
- Dodd-Frank Act
- Regulation Best Interest
- Private Equity
- Private Funds
- Transition Services
- Hedge Funds
- Regulatory Examinations
- Personally Identifiable Information (PII)
- Government Shutdown
- Risk Alert
- Social Media Marketing
- Exchange-Traded Funds (ETFs)
- Investment Company Act
- Rule 6c
- Broker Protocol
- Wells Fargo