If you are a producing supervisor and work alone in a remote office, the NASD is sending you (and management) a special message: Exception reports alone may not be enough supervision. On Feb. 21, the NASD announced it had fined Raymond James Financial Services (RJFS) $2.75 million for failing to maintain an adequate supervisory system to oversee the sales activities of over 1,000 producing branch managers throughout the country. In a related action, the NASD permanently barred RJFS branch manager Donna Vogt, who worked from an office in Campbellsport, Wis., for recommending unsuitable mutual fund and variable annuities to elderly or retirement-age customers, and making misleading statements to customers in correspondence.
The NASD determined that “RJFS failed to detect these sales-practice abuses because of deficiencies in its supervisory system, and that it lacked an adequate system of supervising variable annuity sales,” the NASD stated in a press release. Neither RJFS nor Vogt admitted or denied the charges, but consented to the entry of the NASD’s findings.
The takeaway: “RJFS’ supervisory system was inadequate because it allowed producing branch managers to supervise themselves,” says Emily Gordy, NASD senior vice president and deputy of enforcement. “We’re sending a message to the industry that this is absolutely unacceptable.”
This case, Gordy says, is shedding light on a broader problem: Many independent broker/dealers lack adequate supervisory systems for their branch office systems.
Deju Vu
RJFS is not alone. In late 2006, Gordy says, both Linsco Private Ledger and Securities America agreed to pay several hundred thousand dollars in fines and established improved written supervisory and training policies (among other things, including submitting to investigations by—and accept the recommendations of—an independent consultant approved by the NASD) at their own expense.
Both agreements stem from NASD reviews of these firms between 2003 and 2004, wherein it determined they had failed to establish, maintain and enforce adequate written supervisory systems to review and monitor their variable annuities exchange and other businesses. LPL, which has 3,300 registered reps in over 6,100 offices nationwide, was fined $300,000, and Omaha-based Securities America, with 1,800 reps 900 offices, was fined $225,000. At press time, no one at either firm was available for comment.
“These cases involved the failure of automated supervisory systems,” Gordy says. “The Raymond James case involved that, as well as home-office examiners who lacked adequate supervisory training and the issue of producing branch office managers supervising themselves.”
The root of the problem seems fairly obvious: Having a full-time compliance person or operations manager is often not logistically or economically easy when you’re dealing with tiny, often single-advisor offices geographically dispersed throughout the country. So, in practice, many of these managers wind up supervising themselves.
“The situation at RJ is fairly typical of the structure of independents,” says Andre Cappon, president of the CMB Group, a New York-based industry-consulting firm. “The branches are much more informal and, thus, run the risk of lax supervision. But, the NASD is sounding an alarm bell.”
In its statement, the NASD reported that from early 2000 through September 2004, RJFS employed over 1,100 producing registered principals, or branch managers, most of whom worked in small, geographically dispersed offices. “These branch managers were allowed to act as the primary supervisors of their own business activities,” according to the NASD. “They approved their own transactions, opened and accepted new accounts, and reviewed their own correspondence. The firm relied on an electronic transaction surveillance system, maintained by RJFS’ compliance department and a series of exception reports, to flag transactions that required further review.” It also assigned supervisory responsibility for these 1,100 branch managers to three sales managers, the statement said.
Vogt’s sales-practice violations went undetected for approximately four years, according to the statement. “In determining which products to recommend…she treated her clients as a homogeneous group, regardless of age, financial status, investment experience and objectives,” it read. “Of her approximately 700 accounts, more than 90 percent listed their primary investment objective as ‘growth’ and risk tolerance as ‘medium’. RJFS never questioned the fact that Vogt listed these objectives and strategies for almost all of her customers. In fact, the person who reviewed and accepted the customer account documents was Vogt herself. “
The NASD concluded that Vogt recommended unsuitable purchases and concentrations of aggressive mutual funds and variable annuities to at least five customers. It also determined RJFS’ supervisory system was not sufficiently designed to achieve compliance with securities rules and regulations, finding deficiencies in the firm's branch audit program—and the failure to maintain certain books and records.
“I thought it was a given at any firm that there is someone supervising the supervisors,” a producing BOM at Wachovia in the south says.
Supervising supervisors for large, small-office firms is a challenge. “I think the biggest challenges for large firms is the supervisory practices in small offices,” says one industry consultant, who asked that his name be withheld. “This is not the main driver of business within the firm as a whole, and may not have the critical mass to be covered well within the firm’s supervisory structure. But, the NASD is telling firms they must take heed and institute more frequent and thorough supervision of producing managers.”
But economics of very small branch offices are such that a nonproducing manager or on-site operations managers or compliance people were not viable options. Then again, as one manager we know put it, “A nearly $3 million fine could be better spent.”
