In an area of broker-dealer practices with relatively little guidance—the appropriate level of commissions or mark ups on securities trades—FINRA recently brought another in a series of cases that provides insight into the regulator’s view on additional transaction-based fees. In this particular case, FINRA found that a broker-dealer characterized a $60.50 charge on its customer trade confirmations, which was in addition to or instead of a commission, as “miscellaneous” and/or as an “additional fee.” However, much of this fee, FINRA found, was not attributable to any specific cost or expense the firm incurred in executing the transaction. FINRA found, in effect, that the fee was a commission by another name, and the firm thus understated the amount of the total commissions that it charged on its securities transactions.
According to FINRA’s settlement order, a substantial portion of the charge was not reasonably related to any specific cost or expense the firm incurred in executing each transaction, or determined by any formula applicable to all customers. Instead, a substantial portion of the charge represented a source of additional transaction-based remuneration or revenue to the firm, and was effectively a minimum commission charge. By claiming that the charge was in addition to or in place of a designated commission charge, the firm mischaracterized and understated the amount of the total commissions the firm charged.
FINRA found that the firm violated NASD Conduct Rule 2430, which requires charges for services performed—including miscellaneous services such as collection of moneys due for principal, dividends—or interest; exchange or transfer of securities; appraisals, safe-keeping, or custody of securities; and other services to be reasonable and not unfairly discriminatory between customers. FINRA also found that the firm violated Securities Exchange Act Rule 10b-10, which requires broker-dealers to disclose specified information in writing to customers at or before the completion of a transaction.
The firm consented, without admitting or denying the findings, to a fine of $50,000 (which was imposed for these and several other violations), and to comply with the undertakings and revise its written supervisory procedures. The undertakings are significant, since they reflect FINRA’s view as to the proper way to disclose commissions. In brief, FINRA required the firm, going forward, to identify any transaction-based charge that constitutes remuneration to the firm as a commission or markup/markdown, and not as any charge or fee for postage, handling, or any miscellaneous, additional fee; and to the extent that any transaction-based charge does represent a service performed or a cost incurred by the firm that is not included as part of the reported commission or markup/markdown, required the firm to properly disclose it. FINRA also required the firm to revise its written supervisory procedures to address the requirements of this undertaking and provide relevant training to all associated persons.
FINRA previously announced, in a September 7, 2011 press release, five similar actions against firms that FINRA fined as much as $300,000. The cases resulted from a targeted review of improper fees charged by broker-dealers in which FINRA found that the firms were routinely charging customers – as much as $100 per trade in addition to the disclosed commissions – for handling fees that far exceeded the actual cost of the direct handling-related services the firms incurred in processing securities transactions. There is little doubt that a review of firms’ fees and markups/markdowns remains an important part of FINRA exams, and its exam procedures likely will continue to include a review of “additional” or “miscellaneous” fees.