FINRA said that SunTrust failed to monitor the appropriateness of its fee-based brokerage accounts, even at times charging inactive accounts and double charging both commission and asset-based fees. FINRA also said the firm overcharged commissions on certain low-priced stocks.
In settling this matter, SunTrust neither admitted nor denied the charges, but consented to the entry of FINRA’s findings, according to a FINRA release. In addition to the fine, the firm voluntarily refunded more than $713,000 in fees and interest to affected accountholders. FINRA took into account the refund when assessing the fine, the agency said.
Background on Fee-Based Accounts
Fee-based brokerage accounts have been obsolete since March 2007. The accounts first became available in 1999 as a result of a proposed Securities and Exchange Commission (SEC) rule exempting brokers from certain elements of the Investment Advisors Act of 1940, according to FINRA. However, in March 2007, a federal court struck down the final version of that rule. SunTrust terminated its fee-based accounts, Portfolio Choice accounts, on Dec. 31, 2006.
Customers in a fee-based brokerage account were typically charged an annual fee, which was usually a percentage of the assets in the account with an annual minimum, rather than a commission for each transaction as in a traditional brokerage account. Firms were required to determine whether a fee-based account was appropriate for an investor based on the investor’s preference and projected cost to the investor. Also, it depended upon whether alternative fee structures were available and the services provided, according to FINRA.
“Firms that offered fee-based brokerage services had an obligation to do so using supervisory systems that were specifically designed for such business activities,” said Susan L. Merrill, FINRA executive vice president and chief of enforcement at FINRA. “SunTrust’s former program was yet another example of a firm that failed to put in place supervisory systems designed to ensure that its fee-based account was appropriate for the customers it placed in the program. In addition, SunTrust also failed to monitor these accounts to ensure that they remained appropriate for the customers who opened them.”
FINRA said that during the period from November 2002 through December 2005, SunTrust opened more than 2,644 Portfolio Choice accounts without adequately assessing whether the accounts were appropriate for its customers. SunTrust then failed to appropriately monitor whether the fee-based accounts remained appropriate for its customers.
FINRA said at least 36 Portfolio Choice accounts conducted no trades for at least eight consecutive quarters—and those 36 accounts were charged more accounts $129,000 in fees during the last four inactive quarters. FINRA also found that SunTrust allowed numerous customers to maintain accounts in the program and to pay for those accounts even though they had not traded in years.
Some accountholders paid both a commission and an asset-based fee on the same assets, FINRA said. The double charges resulted in approximately $437,500 in excess fees and/or commissions paid by SunTrust customers.
During the period from Jan. 1, 2002, through Sept. 2, 2005, SunTrust failed to establish a supervisory system, including written procedures to ensure that its registered representatives charged its customers fair and reasonable commissions, according to FINRA. SunTrust used an automated commission system that allowed commissions over 5% to be charged when low-priced and/or low quantities of stocks were bought or sold. As a result, certain customers were charged excess commissions totaling nearly $100,000.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s free BrokerCheck at www.finra.org/brokercheck or by calling 800.289.9999.