NASD Says Raymond James Failed to Supervise. . . but where was NASD?

April 29, 2005

On April 27, 2005, the NASD issued a press release announcing that it had censured and fined Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. $750,000 (and $138,000 in restitution)for violations involving fee-based brokerage. Dramatically, the firms agreed to completely discontinue their fee-based brokerage business by July 1, 2005, and as part of the NASD's sanctions, they must retain an independent consultant should they subsequently engage in such business.

I was struck by two quotes in the NASD's press release:

NASD found that, from April 2001 through December 2004, the Raymond James firms failed to establish and maintain a supervisory system, including written procedures, reasonably designed to review and monitor their fee-based brokerage business. In addition, the firms also violated NASD rules by recommending and opening fee-based brokerage accounts for customers without first determining whether these accounts were appropriate and by allowing those accounts to remain open. . .

Between early 2001 and December 31, 2003, the Raymond James firms recommended and opened fee-based accounts for approximately 2,913 existing customers who had commission-based accounts for more than one year without executing a trade in the account. Based on the customers' trading history, Raymond James should have known these customers were "buy and hold" customers and that fee-based accounts may not have been appropriate for them. Of these 2,913 customers, 190 never executed a trade in their fee-based accounts, yet they paid Raymond James total fees of approximately $138,000. Those customers will be receiving restitution under the settlement announced today.


Okay, so let me see if I understand this. From at least 2001 through 2003 (and in some aspects 2004), the firms failed to establish and maintain an adequate supervisory system and violated numerous NASD rules. These acts of misconduct involved some 2,913 customers.

Would someone please explain to me where the diligent NASD watchdogs were for four years? Let's see if I comprehend the absurdity here. The NASD is supposed to conduct annual oversight of its members --- god only knows how many reports are filed by members with the SRO, how many examiners and lawyers the NASD employs. And for four years the NASD didn't have a clue as to any of these violations? Nearly 3,000 public customers were allegedly victimized, but the vaunted regulator only does something about it in 2005? Were the facts so obtuse that the NASD staff couldn't see the patterns or understand the problems?

Okay, so let's assume the Raymond James firms violated NASD rules. Let's even make that a given for this blog comment. Those firms were censured, fined, and subjected to various undertakings. They have been punished and have assured the NASD that the problems are now a thing of the past.

However, what's the NASD's explanation for its own apparent failure to supervise? Why didn't the SRO know of these violations earlier? Why wasn't the public protected sooner? Similarly, where was the SEC --- the NASD's overseer? How does the federal regulator feel about learning that misconduct effecting nearly 3,000 customer accounts went on under the NASD's many noses for four years? I mean, come on, is this the best we can expect of regulation in the United States.

As I've said so many times before --- it's simply reading toe tags at the morgue. And that's just not good enough.