The Financial Industry Regulatory Authority on Wednesday said that it fined five brokerages close to $1 million for gouging clients in "postage and handling" fees.
In a statement, the self-regulatory agency for broker-dealers, said that the five firms were "understating the amount of total commissions charged to customers in trade confirmations and fee schedules by characterizing a portion of the commission charges as fees for handling services."
In May, FINRA's Chief Executive Richard Ketchum warned brokerage executives at its annual meeting in Washington that it was looking into potential overcharging of postage and handling fees for confirmations. He said that the agency would take enforcement action in "egregious" cases.
In its ruling on the five brokerages, FINRA characterized their postage and handling fees as "far in excess" of the handling-related service the firms provided. In some cases, brokerages hit customers with handling fees of almost $100 per transaction, earning a "substantial percentage" of their revenue from the fees. The fees were charged in addition to commissions.
There is no industry standard on postage and handling fees, say brokerage operations executives unrelated to the cases. Some firms charge as little as $3 per transaction while others charge more than $50.
"Trade confirmations and fee schedules must clearly reflect commission charges, and firms cannot disguise commissions by improperly describing them as charges for ancilliary services," said FINRA.
All of the five firms agreed to pay the fines without admitting or denying the charges. However, they agreed to revise their written supervisory procedures and provided training to their registered representatives and staff. In addition, the firms said they would now identify all transaction based pay as commissions or markups rather than "various" fees.
The firms and their respective fines are:
Pointe Capital, now known as JHS Capital Advisors, of Boca Raton, Fla for $300,000. The firm, said FINRA, charges customers a fee as high as $95 per trade, in addition to commissions. The firm also had inadequate supervisory procedures.
John Thomas Financial in New York for $150,000. FINRA said the firm charged handling fees of up to $75 a trade in addition to commissions. FINRA also cited the firm for making changes in business practices without winning FINRA's approval; and inadequacies in reporting complaints, supervisory controls and certifications, supervision of branch offices and recordkeeping.
First Midwest Securities Inc. in Bloomington, Ill. for $150,000. FINRA said the firm charged a handling fee of up to $99 per trade, in addition to commissions. The regulatory agency also said the firm had unfair and unreasonable markups/markdowns and inadequate written supervisory procedures.
A&F Financial Securities Inc. of Syosset, N.Y for $125,000. FINRA said the firm changed handling fees of up to $65 per trade, in addition to commissions. FINRA also cited the firm for inaequate supervisory systems and procedures.
Salomon Whitney LLC of Babylon Village, N.Y. for $60,000. FINRA said the firm charged handling fees of up to $69 a trade, in addition to commissions.
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