Raymond James owes clients an estimated $6.9 million for failure to apply the appropriate breakpoint discounts, some $3.6 million of which it will recover from financial advisers at Raymond James & Associates and its independent broker/dealer, Raymond James Financial Services. The company said it might also be on the hook for penalties of up to $6.5 million for related enforcement actions by the SEC and the NASD.
Only a handful of B/Ds have announced that they face enforcement action by regulators for breakpoint violations, including Merrill Lynch, Legg Mason, American Express Financial Advisors and Wachovia. But by the NASD's conservative estimates, broker/dealers overcharged customers some $86 million in 2001 and 2002, all of which must be fully refunded.
Since its investigation began earlier this year, the NASD has sent letters of enforcement to some 450 B/Ds imposing various degrees of disciplinary action, said William Alsover, a member of the NASD Mutual Fund Breakpoint Task Force. Alsover is chairman of Centennial Securities Co., a full-service B/D in Grand Rapids, Mich. All 450 firms must send a claim form and a letter pre-written by the NASD to any customers who bought A-class shares between January 1999 and November 2003.
If the customer believes they are owed a breakpoint, the firm will have to investigate and reimburse all monies, plus interest, he said.
In addition, B/Ds with the largest number of breakpoint violations will face fines and must complete a trade-by-trade audit, Alsover said. He estimates that some 20 B/Ds fall into this group.
Merrill is one of them. The company admitted to overcharging customers by some $10 million. So is Wachovia, which said it owes clients some $4 million to $5 million in overdue breakpoints. Legg Mason has not disclosed an amount, but said regulators have proposed a settlement consisting of a "censure, cease and desist order" and a fine of around $2,300. American Express has not disclosed any figures for reimbursements or fines.
Only Raymond James and Merrill Lynch were willing to say that they would apply charge-backs to their registered representatives, while Legg Mason and Wachovia declined to comment, and AEFA said it hasn't yet decided. But industry experts said they expect that most broker/dealers will at least share the costs of reimbursing overcharged commissions with advisers.
"Absolutely they'll charge them back," said Matthew Bienfang, a senior analyst with Tower Group of Needham, Mass. "Most of these independent firms operate on that model. They're very adept at containing costs, on a pay-as-you-go basis. They have very good recovery methods and charge-backs."
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