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by Bill Singer

Broker Dealer Handling Fee Is Disguised Commission

October 9, 2013

One brokerage firm's fee may be another regulator's undisclosed commission. According to this recent FINRA case, the sniff test is in play. Call those add-on charges to customers what you will, if it stinks like a commission, you may find yourself in hot water.


For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Columbus Advisory Group, Ltd. (f/k/a Olympia Asset Management, Ltd.) submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Columbus Advisory Group, Ltd. (f/k/a Olympia Asset Management, Ltd.), Respondent (AWC 2012032017401, September 23, 2013).

Since 2003, Columbus has been a FINRA member firm with three branch offices and about 22 registered persons. The AWC asserts that the firm has had a prior regulator history consisting of a:
  • July 2013 AWC for which it was Censured and fined $22,000 for supervisory failures, failure to file a membership application, advertising, and information barriers ("information barriers?" hey, I don't come up with this stuff, it's what they were charged with in the AWC); and 
  • August 2010 AWC for which it was Censured and fined $10,00 for failing to report ten customer complaints. 
Ticky-Tacky Ticket Fee?

The AWC alleges that from at least April 15, 2010, through April 30, 2012, Columbus charged its customers a $40 handling fee per securities transaction (reflected on confirmations as "Add'l Fee" and in some correspondence as a "ticket fee") in addition to a commission. Allegedly, the handling fee was not attributable to any specific cost or expense incurred by Columbus in executing the trade, or determined by any formula applicable to all customers. Moreover, the handling fee was not determined by the individual registered person executing the order but was imposed in a fairly blanket manner by Columbus. 

SIDE BAR:  NASD Conduct Rule 2430: Charges for Services Performed

Charges, if any, 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, shall be reasonable and not unfairly discriminatory between customers.

The AWC asserts that a "substantial portion" of the $40 fee served as an additional transaction based remuneration or revenue to Columbus; and, as such, the regulator appears to have largely viewed the charge as a commission masquerading as a fee. Consequently, FINRA deemed the characterization of the charges as an "Add'l Fee" or a "ticket fee" as improper and serving to understate the actual commissions charged to a customer in violation of NASD Conduct Rule 2430, Exchange Act Rule 10b-10, and FINRA Rule 2010.

Email 

Additionally, the AWC alleges that between August 17, 2010, and June 8, 2011, through its registered representatives, Columbus sent 14 emails, which misrepresented the source of the "ticket fee" charged on securities transactions. Whether the email was sent in response to a customer inquiry about the $40 fee and/or merely to communicate the ticket fee policy, the cited email explained that the fee was charged by Columbus' clearing firm, when in fact, the AWC asserts that the fee was charged by Columbus and included in the firm's revenue.  The AWC deemed this conduct to be in violation of NASD Conduct Rule 2210 and FINRA Rule 2010.

Settlement

In accordance with the terms of the AWC, FINRA imposed upon Columbus a Censure and $30,000 fine.

Also READ: "$49 Brokerage Handling Fee Deemed Undisclosed Commission" (BrokeAndBroker.com, August 22, 2013)

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