Q:
I've been a Morgan Stanley registered rep for 19 years. Lately, with the new push on account fees for everything, sometimes clients don't pay. Firms charge the broker for the fee and deduct it from the broker's paycheck. By law, I'm not allowed to put money into a client's account. Yet, when I pay the fee, I'm doing just that. I've asked to pay by check, and the firm says no way. I don't see the difference. What am I missing, or is the firm just wrong?
A:
You may be thinking of NASD Rule 2330, which prohibits a rep from sharing in the profits or losses in a customer's account (the rule has a few limited exceptions), or Rule 2370, which generally prohibits borrowing from or lending to customers. That's why a rep can't just put money into a customer's account — it looks like he's reimbursing losses, lending money to a client or paying back a loan. But, agreeing to let the firm take a deduction from your paycheck in order to waive a fee or give a commission discount has to do with what the firm charges for its services (NASD Rule 2430 requires charges for services to be reasonable). It's okay for a firm to do what Morgan Stanley is doing here.
My answer assumes that you've consented to the firm charging you for the fees not paid by the client and chargebacks are nondiscriminatory (i.e., the waived fees don't just occur in accounts that have lost money). If that were the case, an argument could be made the rep was sharing in losses. I agree there's no difference in principle between a payroll deduction and a check payable to the firm. That's probably for the firm's convenience, or it believes a separate check might unnecessarily lead a regulator to ask a few questions. It's just cleaner this way.
Dana N. Pescosolido
Saul Ewing LLP, Baltimore
Saul.com
Phone: 410-332-8738
email: [email protected]
A:
The type of fee deducted from your paycheck will ultimately determine whether the firm can charge you. If the fee is account related, it can come out of your paycheck. However, if the fee arises from ancillary services provided by the firm, the customer's failure to pay should not become your burden. While you are correct that you cannot put money into a client's account, that's not what's happening. You are paying a fee directly to your firm. It seems heavy handed and unnecessary to take it out of your paycheck if you would prefer to take care of it another way.
You could dispute the deductions. Labor code provisions in many states prohibit an employer, in a disagreement over wages, to deduct from an employee's paycheck any amounts that are not agreed to by both parties. So if you were to quit or be fired, your employer is obligated to pay all wages and commissions without deductions for any sums in dispute within days.
Philip M. Aidikoff
Aidikoff & Uhl, Beverly Hills, Cal.
Securitiesarbitration.com
Phone: (310) 274-0666
email: [email protected]
Q:
I've got a $200,000 account and am charging the client 1 percent in a wrap program. The client understands he's paying a management fee and understands what I get in the payout grid. But clients don't understand many mutual funds pay trails via 12b-1 fees of between 25 to 100 basis points. At my firm, brokers don't get the trail; the firm keeps 100 percent of it. But retail clients pay this fee. It's a hidden, completely invisible fee, despite it being in the prospectus — somewhere. In my view, customers are paying twice and don't know it. I haven't spent time talking about it with clients, but don't you think that brokerage firms and mutual funds should quit this arrangement of paying 12b-1 fees in wrap programs?
A:
Your suspicions are correct. If you have knowledge that there is a failure to disclose fees that your client is paying, it's your responsibility to educate the client fully about all fees involved in the investments being made. It doesn't matter whether you receive a portion of the 12b-1 fees or your firm gets 100 percent of the fee.
Your belief that fees are hidden and clients don't understand or have knowledge of these fees makes it all the more imperative that you give full disclosure so clients know what they're paying. That's true whether it's a front-end or back-end fee or commission. Don't rely on a prospectus to cover your responsibilities here. The prospectus alone usually will not satisfy your disclosure duties when you are dealing with the public. This policy should certainly be reviewed by firms and the mutual funds.
Theodore G. Eppenstein
Eppenstein & Eppenstein, New York
Phone: (212) 679-6000
email: [email protected]
Ethical Rep is our monthly column through which more than thirty prominent securities attorneys, experts and law school professors answer questions you, our readers, send anonymously to us.
Encounter a situation at work that makes you uncomfortable? Hesitant to change firms because you're unclear how your clients could be affected? Don't panic. Send your questions to Registered Rep.'s Contributing Editor Ann Therese Palmer.
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