.jpg)
NYSE Regulation, Inc. announced today that it has censured and fined A.G. Edwards & Sons, Inc. (“A.G. Edwards”), a member firm, $900,000 for improperly maintaining customers in non-managed fee-based accounts and charging customers excessive fees, in light of the trading activity in those accounts. The NYSE imposed a requirement on the firm to make restitution to customers relating to the overpayment of fees.
In addition, the firm failed to supervise an errant producing branch office manager who made unsuitable customer trades. A.G. Edwards also failed to properly report to the NYSE statistical data on customer complaints.
“A firm's relationship to its fee-based customers should be regularly reviewed to guard against conflicts of interest,” said Susan L. Merrill, chief of enforcement, NYSE Regulation, Inc. “To meet the needs of the investing public, a firm must reasonably monitor customer activity and educate customers in plain language, to ensure that this type of account is an appropriate choice.”
Increasingly, member firms have been offering customers a wider variety of account types beyond traditional brokerage accounts, including non-managed fee-based accounts. In these accounts, no investment advisory services are provided and the customer is charged a fixed fee and/or a percentage of account value, rather than transaction-based commissions. See also: NYSE Information Memo 05-51, “Non-Managed Fee-Based Account Programs (Rule 405A)" (July 26, 2005). The rule became effective after the events in this disciplinary proceeding.
In March 2000, A.G. Edwards implemented a non-managed fee-in-lieu of commission program known as “Client Choice” in which fees were charged based upon the level of eligible account assets. The firm was aware since the inception of Client Choice of certain concerns associated with this type of program and sent internal communications to branch managers and financial consultants suggesting that Client Choice may not be appropriate for clients who have few transactions and who would pay substantially more in fees than under a standard commission structure.
Though the internal communications also suggested a review of the client’s past activity before opening a Client Choice account, no policy or procedure required such a review and clients were not clearly made aware in writing when they enrolled in Client Choice that the program was not appropriate for buy-and–hold investors.
A review of accounts enrolled in Client Choice between the years 2001 and 2004 disclosed numerous accounts that had no trades for two or more consecutive years. Such customers paid substantially more in fees than they would have had they not been in the Client Choice program. For example, two linked accounts effected no trades during the four-year period 2001-2004. Nevertheless, the linked accounts paid a total of $12,180 in Client Choice fees during that period.
In addition, during a rolling two-year period between 2002 and 2004, numerous accounts paid Client Choice fees that were excessive in light of the limited trading activity in those accounts during that period. For example, an account that had only one trade from April 2002 through March 2004 paid $5,008 in Client Choice fees, 23 times more than the estimated commissions.
A.G. Edwards will retain an independent consultant to review the Client Choice accounts and to determine which accounts enrolled between 2001 and 2004 require restitution. After completion of the review, the firm shall make restitution to the identified customers and send to them written notification that restitution has been made by the firm, with an explanation why. Hearing Board Decision No. 06-133 also noted the firm’s representation that in April 2004 it implemented new supervisory procedures and account requirements concerning the Client Choice accounts.
In addition, the firm failed to supervise an errant producing branch office manager who made unsuitable customer trades. A.G. Edwards also failed to properly report to the NYSE statistical data on customer complaints.
“A firm's relationship to its fee-based customers should be regularly reviewed to guard against conflicts of interest,” said Susan L. Merrill, chief of enforcement, NYSE Regulation, Inc. “To meet the needs of the investing public, a firm must reasonably monitor customer activity and educate customers in plain language, to ensure that this type of account is an appropriate choice.”
Increasingly, member firms have been offering customers a wider variety of account types beyond traditional brokerage accounts, including non-managed fee-based accounts. In these accounts, no investment advisory services are provided and the customer is charged a fixed fee and/or a percentage of account value, rather than transaction-based commissions. See also: NYSE Information Memo 05-51, “Non-Managed Fee-Based Account Programs (Rule 405A)" (July 26, 2005). The rule became effective after the events in this disciplinary proceeding.
In March 2000, A.G. Edwards implemented a non-managed fee-in-lieu of commission program known as “Client Choice” in which fees were charged based upon the level of eligible account assets. The firm was aware since the inception of Client Choice of certain concerns associated with this type of program and sent internal communications to branch managers and financial consultants suggesting that Client Choice may not be appropriate for clients who have few transactions and who would pay substantially more in fees than under a standard commission structure.
Though the internal communications also suggested a review of the client’s past activity before opening a Client Choice account, no policy or procedure required such a review and clients were not clearly made aware in writing when they enrolled in Client Choice that the program was not appropriate for buy-and–hold investors.
A review of accounts enrolled in Client Choice between the years 2001 and 2004 disclosed numerous accounts that had no trades for two or more consecutive years. Such customers paid substantially more in fees than they would have had they not been in the Client Choice program. For example, two linked accounts effected no trades during the four-year period 2001-2004. Nevertheless, the linked accounts paid a total of $12,180 in Client Choice fees during that period.
In addition, during a rolling two-year period between 2002 and 2004, numerous accounts paid Client Choice fees that were excessive in light of the limited trading activity in those accounts during that period. For example, an account that had only one trade from April 2002 through March 2004 paid $5,008 in Client Choice fees, 23 times more than the estimated commissions.
A.G. Edwards will retain an independent consultant to review the Client Choice accounts and to determine which accounts enrolled between 2001 and 2004 require restitution. After completion of the review, the firm shall make restitution to the identified customers and send to them written notification that restitution has been made by the firm, with an explanation why. Hearing Board Decision No. 06-133 also noted the firm’s representation that in April 2004 it implemented new supervisory procedures and account requirements concerning the Client Choice accounts.
Recommendation and Sale of Unsuitable Securities to Retired Persons
During a five-year period, the firm, through William Floyd Gibbs, Sr. (“Gibbs”), its producing branch office manager in its Augusta, Georgia office, made unsuitable trades in customer accounts. To date, approximately 144 customer complaints have been reported to NYSE Regulation concerning Gibbs. The complaints relate to activity that occurred from 1996 through December 2001 and the firm has settled the majority of the complaints for a total of over $30 million.
During this period, Gibbs held seminars directed towards retired persons and those nearing retirement. Many of the attendees were long-term factory workers of a consumer-product company in their late forties, fifties and sixties who had participated in the company’s profit sharing plan and owned hundreds of thousands of dollars in company stock.
Gibbs encouraged the employees to retire, sell their stock in the profit sharing plan and invest the monies with him, employing a trading strategy that, in many instances, included the purchase of unsuitable stocks. In some instances, Gibbs executed unauthorized trades and exercised discretionary trading authority without the customers’ prior written authorization.
A.G. Edwards, through Gibbs, engaged in conduct inconsistent with just and equitable principles of trade by recommending and effecting trades in customer accounts that were unsuitable in view of the customers’ investment objectives, prior investment experience, and financial experience. The firm also failed to reasonably supervise the recommendation and sale of such securities by Gibbs. A previous payment to the State of Georgia shall be deemed to satisfy $400,000 of the fine payable to the NYSE.
See also: William Floyd Gibbs, Decision 06-41 (NYSE Hearing Panel March 27, 2006) (former producing branch office manager barred), Susan Huber Saccone, Decision 06-42 (NYSE Hearing Panel March 27, 2006) (former registered representative disciplined) and Earl Duncan Laing, Decision 06-47 (NYSE Hearing Panel April 20, 2006) (former regional manager disciplined).
Failure to Submit Reports Concerning Customer Complaints
NYSE Rule 351(d) requires the quarterly report of statistical information concerning customer complaints. From January 2001 through March 2004, A.G. Edwards provided inaccurate, incomplete and/or incorrect data to the NYSE in 95 instances. The Hearing Board Decision also noted that beginning in 2002 the firm took corrective steps with respect to customer complaint data reporting.
This disciplinary action concerned violations of NYSE Rules 342(a) and (b), 351(d), 401 and 476(a)(6), and arises from various sources, including findings in annual sales practice exams conducted by the Member Firm Regulation division of NYSE Regulation that were referred to the Enforcement division for further investigation.
In addition, Enforcement also commenced a separate investigation concerning the supervision of a producing branch office manager, and the U.S. Securities and Exchange Commission referred to the NYSE the results of the SEC’s examination of the firm that included fee-based accounts. In settling these charges brought by NYSE Regulation, A.G. Edwards & Sons, Inc. neither admitted nor denied the allegations.
This disciplinary action concerned violations of NYSE Rules 342(a) and (b), 351(d), 401 and 476(a)(6), and arises from various sources, including findings in annual sales practice exams conducted by the Member Firm Regulation division of NYSE Regulation that were referred to the Enforcement division for further investigation.
In addition, Enforcement also commenced a separate investigation concerning the supervision of a producing branch office manager, and the U.S. Securities and Exchange Commission referred to the NYSE the results of the SEC’s examination of the firm that included fee-based accounts. In settling these charges brought by NYSE Regulation, A.G. Edwards & Sons, Inc. neither admitted nor denied the allegations.
About NYSE Regulation, Inc.
NYSE Regulation, Inc., is a not-for-profit corporation dedicated to strengthening market integrity and investor protection. A subsidiary of NYSE Group, Inc., NYSE Regulation’s board of directors is comprised of a majority of directors unaffiliated with any other NYSE board. Each director must also be independent from member organizations and listed companies. As a result, NYSE Regulation is independent in its decision-making.
NYSE Regulation protects investors by regulating the activities of member organizations through the enforcement of marketplace rules and federal securities laws. NYSE member organizations hold 98 million customer accounts or 84 percent of the total public customer accounts handled by broker-dealers. Total assets of NYSE member organizations are over $4 trillion. They operate from 20,000 branch offices around the world and employ 195,000 registered personnel. NYSE Regulation also ensures that companies listed on the NYSE and on NYSE Arca meet their financial and corporate governance listing standards.
NYSE Regulation consists of four divisions: Market Surveillance, Member Firm Regulation, Enforcement and Listed Company Compliance, as well as a Risk Assessment Unit and Dispute Resolution/Arbitration. For more information, visit our website at www.nyseregulation.com .
