State Regulators Find Inconsistencies in Broker-dealer Disclosure Practices

A survey by an association of North American state and provincial securities regulators that found numerous inconsistencies in how broker-dealers disclose fees to customers adds weight to calls from federal regulators for service providers to furnish fee guides to employer retirement plan sponsors.

“[W]ide disparity among firms in the way fees were disclosed” was reported by a project group of the North American Securities Administrators Association in a report released April 24 titled “Broker-Dealer Fee Survey.” The survey comprised about 30 interviews of small, large, full-service and retail broker-dealers conducted by the working group’s eight members in their regions in September 2012.

The survey identified:

• disclosures hidden in small print, embedded in lengthy account-opening documents or using varied terminology that does not define the service provided;
• differences in timing, placement, format, length and location of fee disclosures; and
• questionable practices regarding broker-dealer fee charges and markups.

“From an investor perspective, there is no uniformity in fee or fee change disclosure,” the NASAA working group’s report said.

Information Sought

The broker-dealers surveyed were asked for information on: (1) disclosure of fees to broker-dealer customers; (2) disclosure of additional fees or increase in fees to these customers; (3) whether the broker-dealer has a separate, internal listing of fees; and (4) policies and procedures related to closing accounts and fees charged to closed accounts. The survey report focused on fee disclosures and transfer fees.

As a first step, the NASAA project group suggested establishing a task force to work with the industry to standardize the language, placement and structure of fee disclosures, similar to the approach taken recently by the banking industry to simplify the reporting of its fees.

Among several recommendations, the group offered: “Greater consistency in the timing of fee disclosures to customers would reduce the occasions on which complaints are received by firms and regulators in which customers complain about their surprise at being assessed a particular fee.”

The report also recommended NASAA and FINRA “holistically review” broker-dealer markups to ensure investors are not charged unreasonable fees in violation of the National Association of Securities Dealers Conduct Rule 2340, which dictates reasonable, “not unfairly discriminatory” charges for services performed.

As mentioned, nearly two years after DOL published a proposed rule requiring covered service providers to disclose the cost of what they do for employer-sponsored 401(k)s, the agency is requesting more help for plan sponsors trying to navigate this detailed information.

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