Broker-Dealer Settles State Charges for Excessive Commissions
Commentary by Steven Lofchie
A broker-dealer settled state charges for unreasonable commissions on small principal equity transactions.
According to a Consent Order by the Financial Institutions Securities Division ("Division") of Washington, the lead state in investigations on the same matter by Alabama, Iowa, Massachusetts, Missouri, Montana, and Texas, the broker-dealer charged retail brokerage customers a minimum fixed commission of $95 per equity transaction. On small trades, this flat fee resulted in a commission exceeding five percent of the principal amount - a threshold used under FINRA Rule 2121 ("Fair Prices and Commissions") to evaluate whether a commission is fair and reasonable. The Division stated that the broker-dealer's surveillance system excluded minimum-commission trades from review, meaning the overcharges went undetected.
The Division found that in Washington, the broker-dealer executed 4,109 equity transactions resulting in approximately $160,610.84 in excess commissions. The Division reported that nationwide, approximately 89,900 transactions were affected, resulting in approximately $3,400,000 in excess commissions.
The broker-dealer self-reported the issue to FINRA, and subsequently updated its commission schedule, trade review parameters, and internal policies and procedures.
Under the Consent Order, the broker-dealer agreed to a formal censure, to pay $160,610.84 in restitution to affected Washington customers, plus six percent interest compounded annually, within 120 days of the Order, and to pay a $25,000 administrative fine within 15 days of the Order.
Commentary
This case is significant because it was brought by the States, rather than by the SEC or FINRA. It is not the first enforcement action that the States have brought against firms that charged a fixed minimum commission. The minimum commission in this case was higher than in the two related cases. One question that remains is whether any minimum commission is acceptable. There ought be some reasonable minimum that would be ok, if fully disclosed, but it is not clear that is the case.
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