Raymond James Background Information
Raymond James Financial, Inc. was founded in St. Petersburg, Florida, by Robert (not Raymond) James in 1962. Two years later, it merged with Raymond and Associates to form Raymond James & Associates, Inc. and operated under that name for decades. The parent holding company is now Raymond James Financial, Inc.
The firm’s website chronicles a truly boring 45 year-by-year history, including the name of the firm’s first client and its art show sponsorship. This litany is highlighted by ever increasing additions to and/or replacements of its headquarters. A bit more interesting is a photo of the NFL Tampa Buccaneer’s stadium, to which the firm bought naming rights. The stadium hosted the Super Bowl in 2001 (Colts-34, Giants-7, RJ – flat earnings).
Raymond James Financial Services, Inc. was preceded by Robert Thomas Securities (“Robert” James, plus son “Thomas”), formed in 1980. This subsidiary brokerage unit, has independent contractor brokers who receive 80% to 100% of the commissions from their clients’ accounts. However, the brokers pay their own office and other expenses, including “ticket charges” to Raymond James. The firm earns other revenues on client accounts, including lucrative margin interest. Laws and regulations require securities brokerage firms to supervise independent contractor brokers.
Raymond James went public in 1983, now trades on the NYSE, has $3.8 billion in market capitalization and earned billion dollars in 2006. It claims over 5,000 in personned in over 2,200 locations worldwide (although many of the brokers operate in one person offices or from their homes). The firm has often excelled in sector research and has routinely maintained a high customer approval rating. It is often the subject of takeover rumors.
In an unprecedented action, the NASD censured and fined Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. a total of $750,000 for fee-based (or “wrap”) account violations and ordered the firm to also pay $138,000 in restitution. The firm responded by ending its fee-based business.
In fee-based accounts, firms charge a fixed or a percentage of assets in accounts, rather than traditional commissions on transactions. “Fee-based accounts can be appropriate for many investors,” said a NASD Vice Chairman, but are “not automatically appropriate for everyone,” adding that a firm must consider an investors’ suitability and trading history to determine if a fee-based account is appropriate.
Raymond James first offering fee-based brokerage accounts in early 2001, which grew to almost $5.5 billion in assets by late 2004. But the NASD found that Raymond James did not implement any supervisory system or written procedures to monitor their fee-based accounts, relying instead upon its existing supervisory system.
Many of the Raymond James clients were “buy and hold” customers who would have been better off in a traditional account. Almost 200 of those placed in the “wrap” accounts never even entered into a transaction during the period investigated, yet collectively paid $138,000 in fees! These persons will receive complete refunds.
The NASD also cited Raymond James for using advertising and sales literature that emphasized the benefits of fee-based accounts without adequately discussing the fees and other aspects of such accounts, and using other materials it found inaccurate and misleading.
Raymond James immediately announced it was terminating its fee-based brokerage business rather than retaining an independent consultant and establishing adequate training and supervision of fee-based accounts as also required by the NASD’s order
The NASD fined Raymond James Financial Services, Inc. $2.75 million for failing to adequately supervise more than 1,000 “producing” branch managers nationwide. The investigation began with one such Raymond James manager, who worked from an office in her Wisconsin home.
“RJFS’s supervisory system was inadequate because it allowed producing branch managers to supervise themselves”, said the NASD’s Head of Enforcement. This flawed supervisory system created a situation where the unsuitable sales of variable annuities and risky mutual funds to elderly and risk-averse customers went undetected.”
Raymond James employs over 1000 producing “registered principals”, or branch managers. Most work in small, geographically dispersed offices, or alone, and apparently acted as primary supervisors of their own activities, approved their own transactions, opened and accepted new accounts, and reviewed their own correspondence.
The NASD determined that this, and Raymond James’ compliance through electronic transaction surveillance with only three “sales managers” over the more than 1,000 “branch” managers was insufficient.
The Wisconsin manager’s sales violations went undetected for almost four years, as she handled some 700 accounts and sold mainly mutual funds and variable annuities, including to retired or near retirement clients. Many were sold unsuitable aggressive mutual funds and variable annuities, some were over-concentrated and others were placed into illiquid investments, often with high surrender fees.
The NASD censured and fined Raymond James & Associates, Inc. $90,000 for late and/or inaccurate reporting of municipal securities transactions to the Municipal Securities Rulemaking Board. The NASD is responsible for enforcing MSRB rules.
Prior rules required all dealers to report municipal trades by midnight of the day of the trade, for public dissemination the following day. However, technology allowed the reporting rule to be changed to within 15 minutes of trade execution, so such trade data can be disseminated to market participants soon after the trades are reported.
Yet, for almost 3 years many firms, including Raymond James were lax in meeting the new requirements, crippling the system established to reflect the operations of the municipal market. The Municipal Securities Rulemaking Board thus asked the NASD to enforce the reporting rules. An NASD investigation ensued, and it was determined that a large percentage of trades were had been reported late.
As a result, 20 firms were fined a total of $1.65 million, including a fine of $90,000 levied against Raymond James & Associates, Inc. “Accurate and timely trade reporting ensures that dealers and investors alike obtain an accurate picture of market activity and prices – facilitating a dealer’s ability to price municipal securities accurately and an investor’s ability to make informed investment decisions,” said an NASD spokesperson. The firms neither admitted nor denied the allegations.
The NASD censured and fined Raymond James Financial, Inc. $400,000 for failing to make required disclosures about its registered representatives in a timely manner. Such disclosures are due in 30 days but, according to the NASD’s sanction order, 60% of Raymond James’ reports were late.
The investigation was commenced as a result of complaints by securities attorneys, including the law firm of Shepherd Smith Edwards & Kantas LTD LLP, and others, that securities firms were ignoring requirements to notify regulators of customer complaints, regulatory actions and even criminal charges and conviction in a timely fashion. Some disclosures were made years after the events, often only after broker left the firm and some were never filed.
The industry wide investigation resulted in censures and fines totaling $9.2 million against 29 firms, including Raymond James. The NASD states that over 8,000 disclosures of reportable information about brokers at these firms were late.
Regulators must rely upon firms to make timely disclosure because oversight of more than 665,000 registered brokers at nearly 5,300 registered firms is otherwise extremely difficult. Securities firms chose decades ago to be “self-regulated”.
“Investors, regulators and others rely heavily on the integrity of the information in the CRD public reporting system … and the integrity of that system depends on accurate and prompt reporting by firms,” said an NASD official.
The Securities and Exchange Commission (SEC) and NASD announced disciplinary and enforcement actions Raymond James for causing its clients to pay higher than necessary commissions on mutual funds.
Many mutual funds charge sales commissions, which are paid to firms which sell the mutual funds. Front-end load funds, called “A-shares”, charge the loads when the funds are purchased. These funds almost always offer volume discounts when higher amounts are invested into a fund. Such volume discounts come at various levels of investment (examples: $10,000 or $100,000) which are called “breakpoints.”
Furthermore, mutual fund managers extend the breakpoints to include purchases made into a “family of funds”, so that diversification can be accomplished without missing available breakpoints. As well, funds managers allow time to meet breakpoints, usually a year, and even offer “letters of intent” so investors can get the discounts during that year.
Because breakpoints lower the commissions earned by salespersons, there is room for abuse, and regulators consider it a violation for registered persons to seek to avoid such discounts. The SEC and NASD each brought cases against a group of firms which allegedly were allowing their representatives to violate the “break-point” rules.
The regulators determined that, during the time period investigated, in more than 30% of fund purchases at Raymond James, break point discounts were available but not utilized by its clients, costing these clients a collective total of $2.5 million. These overpayments were ordered to be refunded to these clients.
Canadian regulators sanctioned Raymond James, Ltd., a subsidiary of Raymond James Financial, Inc., for trading violations regarding client priority, order marking, audit trail and supervision. The firm was fined $400,000 plus $125,000 in costs and one of its supervisors was fined an additional $50,000.
Market Regulation Services Inc. (RS) is the independent regulation service provider for Canadian equity markets. It claimed the Raymond James supervisor failed to fulfill his responsibilities as the supervisor of institutional trading and proprietary trading and took no effective steps to supervise traders to ensure compliance with client priority and audit trail requirements which resulted in numerous client priority and related violations.
Raymond James was also required to retain the services of an independent consultant to conduct a review of both its Policies & Procedures Manual and its supervisory and compliance practices in relation to its institutional trade desk.
NASD regulators censured Raymond James & Associates, Inc. and nine other firms for “yield burning” activities and required these firms to pay over $20 million to the U.S. Treasury.
Just as homeowners refinance their homes at lower rates when interest rates fall, so also do state and local governments seek to reduce their borrowing costs by paying off high rate bonds through the issuance of new bonds at a lower rate. If the old bonds are not yet due or callable, the municipality can set-up an “advance refunding.”
In an advance refunding, new bonds are issued and the funds received from the sale of these bonds are placed in escrow to pay off the old bonds when these are due or can be called. U.S. Treasury bonds are purchased in the escrow accounts to avoid any risk that funds will not be available to pay off the old bonds.
Because municipalities can sell bonds which are tax-free to many buyers, they usually can pay rates even lower than paid on U.S treasury bonds. Thus, there is the potential for municipalities to abuse their situation by simply issuing more and more low rate bonds, and using the proceeds to continually buy higher paying U.S. bonds, and pocket the interest difference.
A law was therefore passed to prevent municipalities from earning more on the bonds they purchase than those they issue. This has the further benefit of providing lower cost funds to the U.S. government. Municipalities can, however, build in the costs of the financing – money paid to investment firms – when computing the interest they pay on the bonds they issue.
This leaves room for investment firms to overcharge the municipalities for their advisory and underwriting costs, with the U.S. Treasury footing the bill, not the municipality. This unscrupulous practice is called “yield burning,” which the NASD considers a violation of its “just and equitable principals of trade”.