The state of Texas has fined a small Dallas brokerage firm $20,000 and ordered it to reimburse a client almost $33,000 for failing to have procedures for supervising the conversion of brokerage accounts to investment advisory accounts.
The sanctions filed Monday against Brazos Securities, which has eight registered representatives, were the first related to account conversions that the Texas State Securities Board has imposed, a board spokesman said.
State and federal regulators are stepping up scrutiny industry-wide of the trend to move customers from traditional transaction-based commission accounts to advisory accounts, which generate asset-based fees regardless of whether customers buy and sell securities. Advisory accounts mitigate temptations that brokers might have to churn trades in order to generate commissions, but they also can be more expensive for buy-and-hold investors than transaction-based accounts.
“Conversions are happening at a very fast pace, and the issue of whether an investor understands the fee differences is certainly one that state regulators are focused on,” said Laura Posner, the former head of New Jersey’s Bureau of Securities who is now a partner at Cohen Milstein Sellers & Toll.
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The Securities and Exchange Commission this year is focusing on advisers who “changed the manner in which fees are charged from a commission on executed trades to a percentage of client assets under management,” according to the regulator’s 2018 examination priority guidance.
The SEC generally regulates registered investment advisers with $100 million or more of assets under management, delegating oversight of smaller RIAs to states.
The Financial Industry Regulatory Authority highlighted brokers who recommend switches from brokerage to advisory accounts “where that switch clearly disadvantages the customer” as a focus of its 2018 sales-practice suitability exams.
In April, customers of Edward D. Jones & Co. filed a putative class-action complaint against the firm alleging that it pressured its brokers to switch them to advisory accounts that charge as much as 2% even though the customers rarely traded and would have paid less in commission accounts.
Posner, the former New Jersey securities commissioner, said it is “incredibly difficult” for brokerage firms to clearly educate customers on the potential differences between what they would pay in a brokerage versus advisory account since they are not apple-to-apple comparisons.
The SEC has proposed requiring firms to give clients and prospects a Customer Relationship Summary Form to explain the different care standards and payment schedules distinguishing brokers and investment advisers, but consumer advocates have said the initial draft of the regulator’s disclosure document is too long and confusing for most retail investors to understand.
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