Friday, September 12, 2014

New NASAA Working Group Aims to Improve BD Fee Disclosures

[This story previously appeared in Securities Regulation Daily.]

By John M. Jascob, J.D.

NASAA has formed a joint working group of state securities regulators and industry representatives in an effort to develop improved disclosures of broker-dealer fees. The formation of the working group follows a NASAA survey in April that uncovered not only a wide disparity in how broker-dealers disclose their fees to customers but also certain questionable practices regarding markups.

Mission. “Investors have a right to know how much they are paying for these services,” said NASAA President Andrea Seidt in a news release. “Our goal is to develop a model fee disclosure that is simple to read, easily accessible, and can be used effectively by investors to understand and compare fees.”

Model disclosure. The working group will consider various options in carrying out its mission, including development of a model fee disclosure form, accessibility and transparency guidelines, uniformity in fee language, and recommendations on how to notify customers of fee changes. When exploring model fee disclosure, the working group will focus on several areas, including presentation, customer comprehension, and timing and methodology of fee disclosure. The working group will also take into consideration the different types of firms comprising the industry, including wirehouse firms, independent broker-dealers, clearing firms, and introducing firms.

Membership. In addition to members of NASAA’s Broker Dealer Section, the working group will include representatives from FINRA, the Securities Industry and Financial Markets Association (SIFMA) and the Financial Services Institute (FSI). The working group will also include broker-dealer representatives from Signator Investments Inc., Prospera Financial Services, LPL Financial, Wells Fargo Advisors, Edward Jones, and Bank of America/Merrill Lynch.

Lack of uniformity. NASAA’s survey was prompted by actions taken by state securities regulators in Connecticut involving inappropriate fees charged by broker-dealers. A project group within NASAA’s Broker-Dealer Section conducted the survey by collecting select fee data from 34 broker-dealers starting in 2012. The survey found that disclosures explaining fees to clients ranged from a single paragraph to seven pages in length. Initial fee disclosures also lacked uniformity, whether by method of disclosure, terminology used, or location of the disclosure.

Questionable markups. In addition, the survey results revealed questionable markups on the fees charged to investors. For example, the project group contacted a clearing firm for a number of the broker-dealers in the survey pool to discern how much the broker-dealer was actually charged for various services and compare those underlying costs with fees charged to the customer. The data revealed that the broker-dealers had reaped a significant windfall by charging high markups for services delivered to their customers. In one case, a broker-dealer charged customers $500 to receive securities in certificate form, more than eight times the $60 cost the clearing firm had charged the broker-dealer for the same service.

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