New York Stock Exchange Regulation handed down a $900,000 fine to A.G. Edwards today, marking the regulator’s first fine for abuses in fee-based accounts. The firm was also charged with failure to supervise staff, including one particularly wayward branch manager.
“A firm’s relationship to its fee-based customers should be regularly reviewed to guard against conflicts of interest,” said Susan Merrill, NYSE Regulation’s chief of enforcement, in a statement regarding the fine. An A.G. Edwards spokesperson says these matters were resolved many years ago and that the NYSE fine was disclosed in its 10-K report filed in May. “We are pleased to put the matter behind us. We also modified our policies concerning Client Choice in late 2003 and the activity in these accounts is now reviewed on a quarterly basis,” said the spokesperson.
According to the release, after introducing its nonmanaged fee-based account program (called Client Choice) in 2000, A.G. Edwards failed to ensure that managers and brokers were adhering to firm guidelines regarding suitability of the accounts. The accounts, which charge an annual fee based on client assets (usually 1 percent), may be less appropriate than a commission-based payment arrangement—because of cost—for clients who seldom make transactions in their accounts.
But a review of the Client Choice program between 2001 and 2004 showed “numerous accounts” with no trade activity for consecutive years. In one example, two linked accounts made no trades in that time period, paying the firm $12,180. Another account that made only one trade in two years paid $5,008 over the two years, 23 times more than the estimated commissions.
According to NYSE Regulation’s Linda Riefberg, these are the reasons fee-based accounts are a growing focus of NYSE Regulation and a “high-priority area” when the department is conducting examinations of member firms.
In a related matter, NYSE Regulation named A.G. Edwards for failing to supervise William Floyd Gibbs, an Augusta, Ga.-based producing branch manager. While employed at Edwards between 1996 and 2001, Gibbs recommended unsuitable investments to his mostly elderly clients and used discretion and executed trades in client accounts without permission. In that time, but primarily between 2000 and 2001, Gibbs received 144 customer complaints, costing the firm $30 million in settlement costs.
Riefberg says the $30 million already paid to aggrieved customers was weighed in determining the proper fine amount. Gibbs was permanently barred from the securities industry by a NYSE hearing panel in March 2006. In April, Earl Duncan Laing, the A.G. Edwards regional manager in charge of supervising Gibbs, was barred for two years from supervisory activity and required to retake all supervisory examinations before returning to that responsibility.