Stoltmann Law Offices is investigating cases where brokers have traded excessively and churned their clients’ accounts. FINRA, the U.S. securities industry regulator, reached a settlement with R.W. Baird for allegedly overcharging commissions on thousands of stock trades in 2019 and 2020. The firm will pay more than $416,000 in fines and restitution.
FINRA alleged “a substantial failure to supervise the commissions the firm was collecting, citing a minimum-commission policy of $100 per trade that resulted in inappropriately large fees for clients who made smaller transactions,” Barron’s reported. FINRA cited one case involving a Baird client who “purchased two shares of Apple stock for $772 and paid the $100 commission, amounting to 13% of the principal transaction.”
FINRA cited three rules that Baird allegedly violated in its trading activity, including FINRA Rule 2121, which sets terms for fair prices and commissions. That rule offers guidance that firms should cap commissions at 5%, but notes that percentage “is a guide, not a rule. FINRA urges brokers to think of the 5% threshold as a ceiling, not a floor, noting that other factors might render a commission at that level too high.”
“In the case of Baird, the static $100 commission policy led to some extreme overcharges, reaching 93% of the principal value of the transaction at the high end,” FINRA noted. All told, FINRA concluded that “Baird collected $266,481 in unfair commissions involved with 7,277 transactions executed on behalf of 4,623 clients. On average, that works out to $37 in excess commission per transaction.”
Baird claimed it “had policies in place to flag and review transactions where clients would be charged more than 5% of the principal, but those systems evidently failed to catch small-dollar transactions when the $100 minimum amounted to more than the 5% threshold.”
Baird conceded to a censure and acknowledged the alleged conduct without admitting or denying the specific findings, according to Barron’s.
Although the “5%” rule has been a guideline for decades, FINRA advises brokers to “not charge his customer more than a fair commission or service charge, taking into consideration all relevant circumstances, including market conditions with respect to such security at the time of the transaction, the expense of executing the order and the value of any service he may have rendered by reason of his experience in and knowledge of such security and the market.”
Brokers, however, are required to disclose all fees, mark-ups and commissions: “Any disclosure to the customer, before the transaction is effected, of information which would indicate (A) the amount of commission charged in an agency transaction or (B) mark-up made in a principal transaction is a factor to be considered. Disclosure itself, however, does not justify a commission or mark-up which is unfair or excessive in light of all other relevant circumstances.”
Brokerage firms are legally required by FINRA to monitor what and how much their brokers are selling – their investments must be vetted and authorized by the firms – and have an obligation to investors to fully reveal true risk, cost and return information about the vehicles sold. Broker-dealers and advisors are also required to fully vet all of the investments they are selling to determine if they are suitable for your age and risk tolerance.
If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!