Brokers are burying fee disclosures in complicated customer documents and sometimes levying unreasonable charges, according to a report released Thursday by state securities regulators.
In a
survey of 34 broker-dealers from across the country, the North American Securities Administrators Association Inc. found widely inconsistent disclosure methods and questionable practices regarding fee charges and markups.
For instance, fee disclosures ranged between one paragraph and seven pages and were sometimes embedded in a document that totaled anywhere from one page to 45 pages.
“While broker-dealers may comply with the technical requirements governing fee disclosures, their disclosures lose effectiveness when hidden in small print, embedded in lengthy account opening documents, or vague in terminology that does not define the service provided,” the NASAA report stated. “Broker-dealer customers would benefit from greater consistency and transparency in the disclosure of fees.”
The report recommended that NASAA work with the
Financial Industry Regulatory Authority Inc., the industry-funded broker regulator, to develop a model fee disclosure that is “simple to read, easily accessible, and can be used effectively by investors to understand fees and to conduct fee comparisons,” the report stated.
Finra has been addressing the issue and plans to do more.
“As NASAA notes in its survey report, Finra has been focused on disclosure of fees in retail brokerage accounts and individual retirement accounts for some time and issued guidance as recently as last year,” Finra said in a statement. “In addition, Finra is currently in the process of revising its rules on fees and markups.”
The report also recommended that NASAA set up a task force to work with the financial industry in “standardizing the language, placement and structure of fee disclosures similar to the approach taken in the banking industry.” It also encouraged more investor education.
“The report raises concerns regarding the transparency and reasonableness of broker-dealer fee practices,” Ohio Securities Commissioner and NASAA President Andrea Seidt said in a statement. “State regulators will be examining these issues more closely, but welcome the opportunity to work with the industry to ensure that fees are reasonable and fairly disclosed to investors. Improved fee disclosure will help investors compare fees effectively and efficiently.”
The Financial Services Institute, which is comprised of independent broker-dealers and financial advisers, supports making fee disclosures more meaningful to investors as long as standardization takes into account differences among firms.
“We are encouraged that NASAA wants to work with the industry to develop more uniform fee disclosures,” David Bellaire, FSI executive vice president and general counsel, said in a statement. “However, when determining disclosure requirements, it is important to keep in mind that not all firms have the same structure and resources and therefore a one-size-fits-all solution may not be workable.”
Another group that represents registered representatives also endorses fee transparency.
“Disclosure shouldn't be buried in the fine print,” said Gary Sanders, vice president of securities and state government relations at the National Association of Insurance and Financial Advisors. “People who are running legitimate operations should not have anything to hide.”
Developing a common disclosure format is a good idea, Mr. Sanders said.
“There is a place for some kind of uniformity, so that people can compare apples to apples,” Mr. Sanders said.
The catalyst for the NASAA study was an investigation in Connecticut in 2010 and 2011 that resulted in fines against several broker-dealers for inappropriate charges. Finra also took similar action against five broker-dealers in 2011.
The NASAA study found that markups related to transferring customer accounts from one broker or bank to another ranged from 100% to 280% above the wholesale cost of the transfer.
