Last week, NYSE Regulation censured and fined A.G. Edwards & Sons $900,000 for improperly placing customers in fee-based accounts that charged excessive fees. In addition, the firm is also required to make restitution to customers who were placed in the unsuitable accounts.

In addition, the regulator charged Edwards with failing to supervise a branch office manager who made unsuitable trades for clients. Edwards, a NYSE member firm, also failed to accurately report statistical data on customer complaints to the NYSE, according to the regulator.

Like most brokerage firms, Edwards implemented non-managed fee-based brokerage accounts a few years back. Its program, known as “Client Choice,” launched in March of 2000 and charged its fees based on a client’s account assets.

Regulators warned firms about the accounts at the time and continue to warn them that fee-based accounts may not be suitable for clients who make few transactions. That’s because such clients would pay less in a commission-based account.

Via internal memos, Edwards told reps and branch managers to review their clients’ past trading activity before opening a Client Choice account. But at no point did the firm implement a policy or procedure that would force such a review before a rep enrolled a client in the account.

Furthermore, the firm failed to clearly inform clients in writing when they enrolled in Client Choice that the program was not appropriate for buy-and–hold investors.

The NYSE discovered that between the 2001 and 2004, a number of the fee-based Client Choice accounts had no trades for two or more consecutive years. As a result, those clients paid substantially higher fees than they would have in an ordinary commission-based account.

For instance, two linked accounts that made no trades whatsoever over that four-year period nonetheless paid a total of $12,180 in Client Choice fees over that span. And that’s just one example, with some clients paying more than 23 times the fees they would have been charged in a commission-based account.

“A firm's relationship to its fee-based customers should be regularly reviewed to guard against conflicts of interest,” Susan L. Merrill, chief of enforcement, NYSE Regulation, said in a release. “To meet the needs of the investing public, a firm must reasonably monitor customer activity and educate customers in plain language, to ensure that this type of account is an appropriate choice.”

As part of its settlement with the regulator, the brokerage must hire an independent consultant to review its Client Choice accounts and to determine who deserves restitution. Then the firm will make restitution to those customers.

NYSE Regulation has had its eye on the enrollment of unsuitable clients into fee-based brokerage accounts for awhile now. Last summer, the SEC approved NYSE Rule 405A(1), which would require brokerages to give all prospective fee-based account clients with a document describing the fees and services associated with the account types available to them.

Edwards also faces the NYSE’s wrath for failing to properly supervise William Floyd Gibbs, Sr., the producing branch office manager in its Augusta, Georgia office. Over the course of a five-year period, Gibbs made a number of unsuitable trades in customer accounts, resulting in approximately 144 customer complaints to NYSE Regulation about him.

Gibbs targeted retired persons and those nearing retirement, pitching a trading strategy that often involved the purchase of unsuitable stocks. To add to the risk, Gibbs also executed trades without the customers’ prior written authorization. The five-year period of improper trades ran from1996 until December 2001, costing the firm more than $30 million to settle the majority of the complaints.

As for Edwards, it failed to reasonably supervise the recommendation and sale of the unsuitable securities by Gibbs. The NYSE decided that previous payment to the state of Georgia will satisfy $400,000 of the fine payable to the NYSE.

Last but not least, the NYSE found that from January 2001 until March 2004, the firm handed over inaccurate, incomplete and/or incorrect data to the NYSE in 95 instances. The firm has since taken steps to repair its customer complaint data reporting.

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