Raymond James Paying $15 Million for Not Doing What It Said It Would Do
Darling, you got to let me know
Should I stay or should I go?
If you say that you are mine
I'll be here 'til the end of time
So you got to let me know
Should I stay or should I go?
The Clash, “Should I Stay or Should I Go?” from Combat Rock (1982).
That’s what Raymond James investors wondered From January 2013 through May 2018. Should they stay in their advisory accounts, or should they go to straight brokerage accounts that wouldn’t carry advisory fees. So Raymond James & Associates’ and Raymond James Financial Services Advisors’ brochures said they would conduct reviews at specified intervals to determine if advisory accounts remained suitable for clients or if the clients’ assets should be moved. (The SEC called the two “RJ Advisers”, so we will, too.) According to the SEC, though, RJ Advisers didn’t actually conduct these reviews in a timely way.
Adviser Issues
Specifically, RJ Advisers failed to review over 7,700 advisory accounts after they had no securities trading activity for at least 12 months. Meanwhile, these inactive accounts paid RJ Advisers almost $5 million in advisory fees. RJ Advisers also used incorrect valuations for unit investment trusts to calculate management fees for some advisory clients, resulting in excess advisory fees. Allegedly!
Their main problem here is that if an investment adviser says in Form ADV Part 2A, the brochure, that it is going to do a thing, it needs to do the thing. Investors who want to put their money on autopilot (I’m one of those!) and who are paying an adviser to keep them on the right track without doing a lot of costly and maybe counterproductive trading could reasonably rely on the adviser to get them out of an advisory account that doesn’t make any sense for them. Here, the SEC says Raymond James dropped the ball
Broker-Dealer Issues
Separately, the administrative order found that Raymond James & Associates and Raymond James Financial Services (together, “RJ Brokers”) recommended that brokerage customers sell unit investment trusts before their maturity and buy new ones without adequately determining whether those recommendations were suitable.
Do you know what a unit investment trust, or UIT, is? I’m not going to lie to you. I didn’t. But the SEC’s administrative order tells us:
A UIT is a registered investment company that holds a portfolio of securities that is not actively managed by an adviser. UIT issuers make a public offering of units, typically for a one to six-month primary offering period, and may support a secondary market. UIT term lengths vary, but a UIT commonly has a maturity date that is between 15 to 24 months from the initial offering date. At maturity, an investor holding a UIT typically has three options: (a) receive the proceeds based on the value of the investment; (b) rollover the investment into a newly-issued UIT (“rollover”); or (c) under limited circumstances, receive the proportionate share of the securities held in the portfolio, i.e., an in-kind transfer.
The SEC says RJ Brokers did two things in particular. First, by recommending that holders sell their UITs before maturity and then buy back new ones, they generated about $5.5 million in excess sales charges from over 2,000 affected brokerage accounts. On its website, meanwhile, Raymond James described UITs as “best suited as buy and hold investments.” UIT issuers were saying the same sorts of things. Second, they failed to disclose their conflict of interest by recommending UITs without applying almost $660,000 in applicable sales-load discounts to brokerage customers in 5,468 eligible accounts, for which RJ Brokers received greater compensation.
In a more minor sidenote, RJ Advisers were also tagged because “instead of applying the advisory CUSIP price [on the UITs from 2013 through 2017], RJ Advisers mistakenly applied the brokerage CUSIP price to calculate the advisory fee for certain UIT positions. Because the brokerage price was higher than the advisory price for the first few months after issuance of the UIT, the assets in advisory client accounts were overvalued.” This one follows up on the Deer Park Road valuation matter from June.
Hmmm. . .
I don’t know what to tell you. If you’re an adviser and you’re telling your clients in your brochures that you’re going to look out for them in a specific way . . . I mean, first, your fiduciary duties require you to follow up and do that. Second, though, if you don’t do it, your brochures are now a road map for the SEC to charge you. Also, don’t advise your clients to take positions that are against their interests. Maybe that doesn’t go without saying.
The various Raymond James entities were hit with alleged violations of Sections 17(a)(2) and (3) of the Securities Act, as well as Sections 206(2) and 206(4) of the Advisers Act, as well as Rule 206(4)-7. They were ordered to pay over $12 million in disgorgement and prejudgment interest, and a $3 million civil penalty.