Compliance failures lead to $15M penalty for Raymond James

According to the SEC order, at various times, from at least January 2013 through May 2018, Raymond James engaged in several violations. Specifically, Raymond James & Associates (RJA) and Raymond James Financial Services Advisors (RJFSA)—collectively “RJ advisers”—failed to conduct promised suitability reviews for certain advisory accounts; did not adopt policies and procedures reasonably designed to prevent violations concerning the suitability of fee-based advisory accounts; and overvalued certain assets that resulted in charging excess advisory fees.

The SEC order also states RJA and Raymond James Financial Services (RJFS)—collectively “RJ brokers”—failed to have a reasonable basis for recommending certain unit investment trust (UIT) transactions to brokerage customers and failed to disclose the conflict of interest associated with earning greater compensation when recommending certain securities without providing applicable sales-load discounts to brokerage customers. “These failures involved products sold and services provided to retail investors,” the SEC order states.

The SEC order finds RJ advisers failed to “timely and adequately” conduct promised ongoing reviews of advisory accounts that had no securities trading activity for at least one year, as required by its own policies and procedures. “RJ advisers’ policies and procedures required financial advisors and the compliance department to monitor the inactive accounts. Specifically, financial advisors were to ‘continually monitor their client accounts,’ discuss with clients ‘the reasons for [account] inactivity,’ and ‘document all client conversations and meetings’ to demonstrate ‘ongoing management of the accounts,’ ” the SEC order states.

“After 12 months of inactivity, RJ advisers’ policies and procedures directed compliance staff to contact the financial advisor’s branch to confirm in writing that advisory services were being provided to the client,” the order states. If an account remained inactive for another year, the policies and procedures “required compliance staff to seek additional documentation evidencing the provision of advisory services.”

Between January 2013 and September 2017, RJ advisers failed to properly review 7,708 inactive accounts, which paid RJ advisers approximately $4.9 million in advisory fees, according to the SEC order.

Another compliance failure mentioned in the SEC order is that RJ advisers “failed to adopt and implement reasonably designed policies and procedures concerning inactive advisory account monitoring and review consistent with their representations to their clients. Among other things, RJ advisers did not have escalation procedures in place if the compliance group did not receive an adequate or timely response to their inquiry from the branch location.”

“Until 2015, the policies and procedures also did not have a deadline for RJ advisers’ compliance department to complete the reviews or reach a resolution regarding account status. Deadlines were later incorporated into the policies and procedures, but the reviews were not implemented in a timely manner. In addition, RJ advisers did not have policies and procedures in place reasonably designed to determine whether inactive accounts were appropriate for conversion to a brokerage arrangement.”

UIT-related allegations

According to the SEC order, Raymond James engaged in additional violations that affected both brokerage customers and advisory clients who owned UITs. In particular, RJ brokers did not have a reasonable basis for recommending certain brokerage customers sell certain UIT positions prior to their maturity dates.

The recommendations for early sales and purchases resulted in customers incurring (and the Raymond James entities receiving) greater sales commissions than would have been charged had the customers held the UITs to maturity and then purchased new UITs. Specifically, these recommendations generated approximately $5.5 million in excess sales charges and affected 2,044 brokerage accounts, according to the SEC order.

Additionally, Raymond James “failed to disclose their conflict of interest by recommending UITs without applying almost $660,000 in applicable sales-load discounts to brokerage customers in 5,468 eligible accounts, for which RJ brokers received greater compensation,” the SEC order states. “In addition, RJ advisers used incorrect UIT valuations to calculate management fees for certain advisory clients, resulting in approximately $51,000 in excess advisory fees.”

The order charges RJA and RJFSA with violating Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7. It also charges RJA and RJFS with violating Sections 17(a)(2) and (3) of the Securities Act of 1933.

To settle the charges, the three Raymond James entities agreed to be censured and to disgorge approximately $12 million representing inappropriate client advisory fees and unit investment trust commissions, together with prejudgment interest; pay a $3 million civil penalty; and make distributions to harmed investors.