NASD announced today that it has fined Raymond James Financial Services, Inc. (RJFS) of St. Petersburg, FL, $2.75 million for failing to maintain an adequate supervisory system to oversee the sales activities of over 1,000 producing branch managers working in offices throughout the United States.
In a related action, NASD permanently barred one of those branch managers - Donna Vogt, who worked for the firm from her home office in Cambellsport, WI. Vogt recommended unsuitable mutual fund and variable annuity purchases to elderly or retirement age customers, and made misleading statements to customers in correspondence. RFJS failed to detect these sales practice abuses because of deficiencies in its supervisory system. RFJS also failed to have an adequate system in place to properly supervise sales of variable annuities.
"RJFS's supervisory system was inadequate because it allowed producing branch managers to supervise themselves, said James S. Shorris, NASD's Executive Vice President and Head of Enforcement. "This flawed supervisory system created a situation where the unsuitable sales of variable annuities and risky mutual funds to elderly and risk-averse customers went undetected."
From early 2000 through September 2004, RJFS employed over 1,100 producing registered principals, or branch managers, most of whom worked in small, geographically dispersed offices. These branch managers were allowed to act as the primary supervisors of their own business activities. They approved their own transactions, opened and accepted new accounts, and reviewed their own correspondence. The firm relied on an electronic transaction surveillance system maintained by RJFS's Compliance Department, and a series of exception reports, to flag transactions that required further review. It also assigned supervisory responsibility for these 1,100 branch managers to three sales managers. The activities commonly associated with daily supervision, however, were conducted by the branch managers, who in many cases, in effect, supervised themselves. By permitting these principals to engage in self-supervision, RJFS's supervisory system was not reasonably designed to achieve compliance with securities rules and regulations.
One such producing manager was Donna Vogt, whose sales practice violations went undetected for approximately four years. Vogt was the branch manager and the only registered person working in her office in Wisconsin. She maintained hundreds of customer accounts and sold mainly mutual funds and variable annuities. Many of her customers were of retirement age or older. NASD found that, in determining which products to recommend, Vogt treated her customers as a homogeneous group, regardless of age, financial status, investment experience and objectives. Of her approximately 700 accounts, more than 90 percent listed their primary investment objective as "growth" and risk tolerance as "medium." RJFS never questioned the fact that Vogt listed these objectives and strategies for almost all of her customers. In fact, the person who reviewed and accepted the customer account documents was Vogt herself.
NASD found that Vogt recommended unsuitable purchases and concentrations of aggressive mutual funds and variable annuities to at least five customers who were elderly, retired or nearing retirement. These transactions were unsuitable due to the over-concentration in aggressive growth funds, and because access to their funds was limited by the variable annuity surrender charges.
RJFS failed to detect or prevent these unsuitable transactions by Vogt. The firm also failed to prevent Vogt from sending misleading communications to some of her customers, in part because the firm allowed all of its producing branch managers, including Vogt, to review their own incoming and outgoing correspondence.
NASD found additional supervisory deficiencies at RJFS. The firm failed to maintain an adequate system and written procedures to reasonably supervise sales of variable annuities. Branch managers reviewed and endorsed most of their own variable annuity activities. RJFS's Compliance Department screened variable annuity purchases using only three exception reports. The exception reports did not screen variable annuity transactions for suitability based on customer net worth, annual income, investment experience or concentration of variable annuity holdings as a percentage of net worth. As a result, Vogt's unsuitable variable annuity recommendations went undetected. In addition, there was no system in place at the firm for reviewing the suitability of variable annuity sub-account transactions recommended by branch managers, nor was there any system for ensuring that a record of sub-account recommendations and transactions was maintained. NASD also found deficiencies in the firm's branch audit program, and found that RJFS failed to maintain certain books and records.
Neither RJFS nor Vogt admitted or denied the charges, but consented to the entry of NASD's findings.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge. In 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com . Investors can also access this service by calling (800) 289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business-from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.nasd.com .
("Copyright 2007 National Association of Securities Dealers, Inc.")
