Raymond James & Associates Inc., the giant investments brokerage and asset management firm, has agreed to pay $8.2 million in restitution to settle allegations that it overcharged some customers for commissions on trades of stocks and other equities.
In addition to restitution, Raymond James & Associates and an affiliate, Raymond James Financial Services Inc., will pay $4.2 million in fines and penalties, according to the office of Secretary of State William Francis Galvin.
The settlement, which was announced Tuesday, is the result of an investigation by six states, with the Massachusetts Securities Division leading the probe, according to the office of the secretary of state. The other states are Alabama, California, Illinois, Montana, and Washington.
The settlement involves trades of securities of small value during a five-year period beginning in 2018. In general, Raymond James charged commissions on the purchase and sale of equities based on the amount of the value of the trade, according to the office of the secretary of state.
Raymond James charged 3 percent of the principal for trades up to $5,000, for example. At the high end, the brokerage firm charged .08 percent of the principal on trades of $50,000 and more (plus fees ranging from $5 to $355).
Raymond James set a minimum commission of $75 for certain buy and sell transactions, the office of the secretary of state said. But the brokerage firm had “an alternative small transaction commission schedule, available for equity sell transactions with a principal amount of $300 or less,” according to a consent order agreed to by the states and Raymond James.
That alternative schedule for small transactions allowed Raymond James agents “to charge between $0 and $35 per transaction versus the $75 minimum equity commission,” the consent order says.
But many small transactions defaulted to the $75 minimum equity commission, the consent order says.
“Despite the small stock transaction schedule of $35 or less,” Raymond James’s “order entry system defaulted to the $75 minimum equity commission,” even on trades of $300 or less, the consent order says.
Beginning in 2018, Raymond James charged $75 when the commission should have been $35 or less in more than 270,000 transactions, the consent order says.
State law prohibits brokerage firms from “charging unreasonable commissions,” the consent order says.
Based on its investigation, the state Securities Division concluded that Raymond James “charged unreasonable commissions on approximately 270,000 low-principal equity transactions nationwide over the past five years totaling over $8.2 million,” the consent order says.
In some instances, the commission was almost the size of the principal, the consent order says. Charging a $75 commission on an $82 trade would mean a customer paid a 91 percent commission.
“Numerous equity transactions executed by [Raymond James] included a commission in excess of 90 percent of the principal value of the transaction,” the consent order says.
The Securities Division considers any commission above 5 percent of the principal to be unlawfully excessive, the consent order says.
The Securities Division also said Raymond James failed to “reasonably surveil transactions … to ensure that [Raymond James] charged its customers a reasonable commission and fee,” the consent order says.
The absence of adequate reviews of low-principal transactions caused Raymond James to fail to “detect and correct unreasonable commission charges,” the consent order says.
Raymond James on June 30 submitted an offer of settlement to the Securities Division, which was accepted, the consent order says.
Raymond James “neither admits nor denies the facts set forth” in the consent order but “consents to entry of the order … thereby settling the matter,” the consent order says.
Raymond James responded to the settlement with a statement in which it said the brokerage firm was “pleased to resolve this matter regarding commissions charged in a specific population of small principal amount equity trades generated by our automated commission process.
“All impacted clients will be reimbursed the excess commission amounts plus interest and we are implementing the necessary adjustments to our equity commission schedule,” the statement says. “Our commitment to putting clients’ interests first remains our top priority.”
Galvin, in a press release, said Raymond James paid $2 million in restitution and fines in 2011 in a case that was “identical to this.”
“This isn’t the first time Raymond James has overcharged customers,” Galvin said. “It is clear from these actions that there is a continuing need for state regulators to work together to protect the best interests of investors.”
Massachusetts residents are entitled to more than $185,000, plus 6 percent interest, in restitution, the press release says. The state will receive $100,000 in an administrative fee, the press release says.