Wachovia also has to identify and pay reimbursement to 1,300 customers who were wrongly allowed to maintain fee-based accounts or charged accounts fees on Class A mutual fund share holdings for which they had already paid a sales load. The firm has to hire an outside consultant to see that the process is followed.
“Firms mush have systems and procedures which are tailored to reasonably supervise their business activities,” said James Shorris, NASD’s vice president and head of enforcement. “In the case of fee-based accounts, firms had an obligation to their customers to assess the appropriateness of such accounts both when the accounts were opened and periodically thereafter,” he said.
During the timeframe, Wachovia failed to establish and maintain supervision, including written procedures designed to monitor its Pilot Plus program, a fee-based account offering from Wachovia that started in 1999.
An investigation shows that 594 customers, who did not trade in their Pilot Plus accounts for a minimum of two consecutive years, paid the firm around $1.9 million in fees. Also, 620 customers who held assets of $25,000 or less for at least a year, paid minimum annual fees of $1,000. That fee represented twice the stated top rate of 2% allowed under the program.
Also, two brokers who were poached from another firm bought more than 340 customers with them and opened Pilot Plus accounts for them. When recommending the program, the brokers used a letter that stated the Pilot Plus was a “fee-based, investment advisory service.” However, the program was a fee-based brokerage account. When the firm found out that the brokers wrongly identified the program, it did not respond in a timely manner to correct the false representation to customers.