Raymond James agreed to its second major regulatory payout in as many months over barred financial advisors who are alleged to have harmed clients during their tenures with the firm.
The Oct. 20 settlement between FINRA, Raymond James & Associates and Raymond James Financial Services comes as wealth managers and financial advisors brace for ramped-up enforcement under the SEC's 2-year-old Regulation Best Interest rule . FINRA, the brokerage regulator overseen by the Securities and Exchange Commission, completed its first action under Reg BI earlier this month. At a compliance conference last week, a FINRA official and two securities lawyers explained how the rule could lead to more enforcement and client complaints under the tougher advice standards.
Raymond James' latest case displays another example of a giant wealth manager taken to task for missing the red flags raised by problematic brokers under regulations that were already in place before the rule. Last month, the firm agreed to a different settlement with the SEC after that regulator alleged the company never adequately investigated a branch manager's concerns about a broker who was defrauding a 98-year-old World War II veteran . This month, Raymond James agreed to pay nearly $849,000 in a fine and additional restitution on top of the $2.3 million in client arbitration settlements relating to two ex-brokers accused of secretly hiking up their commissions through forged trade confirmations over more than a half dozen years.
Advisors Taek Man Chong and his son, Jason Taek Chong, carried out "a scheme to overcharge commissions to seven institutional customers, which they serviced as part of a team," according to FINRA's letter of acceptance, waiver and consent. "Although the scheme raised multiple red flags, [Raymond James Financial Services] failed to reasonably investigate them."
FINRA's settlement didn't include the names of the brokers, but investigators listed them as having been banned from the industry in June 2018 after operating out of a Mercer Island, Washington-based branch of Raymond James. The date and location match the two former brokers' records on FINRA BrokerCheck , which lists five settlements paid by the firm to Taek Man Chong's clients between 2018 and 2021. FINRA barred them for not responding to its requests for information about their "voluntary termination" amid the firm's investigation in 2018.
The lawyers who represented the two brokers in their FINRA proceedings didn't respond to requests for comment.
Representatives for Raymond James declined to comment on the latest settlement, in which the firm neither admitted nor denied the findings of FINRA's investigation.
As in the separate SEC case last month , the giant wealth manager with more than 8,600 advisors agreed to pay an additional penalty involving its supervision, on top of the millions of dollars it has already paid to the harmed clients. In addition, FINRA ordered the firm's two brokerages to pay a combined $300,000 in an extra fine stemming from the failure of principals to approve changes to the name or designation of 7,500 trade orders between 2012 and 2020. The firm addressed the problem in February 2020 by assigning trading desk principals the specific task of reviewing and approving the adjustments to the orders, FINRA said.
Raymond James' handling of the father-son team bore other disturbing similarities with the earlier case in that the brokerage could have stopped the harmful conduct had it followed up on its own internal compliance alerts, according to investigators. For more than six years between January 2012 and April 2018, the two brokers overcharged the clients by $2.4 million by calling trading desks to boost the commission rate on transactions, then doctoring the confirmations to conceal that they were charging higher costs, FINRA said.
In 2018, the firm finally "flagged and reviewed an unusually large order" from one of the clients, the settlement order said.
Previously, the Raymond James email surveillance system had flagged hundreds of emails sent to clients by the two brokers that had the "misleading trade confirmations" as attachments, according to the document. Raymond James' compliance team reviewed the emails but never looked at the attachments, according to FINRA. Besides that flub, a branch inspection team had identified the faulty confirmations in April 2017 and sent them up the firm's supervisory chain, FINRA said. However, the firm never checked their accuracy, according to investigators.
Regulators and client attorneys gained relatively new tools to file cases against wealth managers over such alleged breaches after the June 2020 implementation of Reg BI . The standard demands that brokers make recommendations in a client's best interest, rather than the earlier guideline requiring them to supply merely "suitable" advice. Still, the standard falls below those of fiduciaries, who are required to place clients' interests ahead of their own.
"There is a lot of overlap between suitability and Reg BI, but there's also quite a bit that Reg BI adds to the conversation and things that Reg BI is explicit about that wasn't explicit in the suitability rule," Christine Lazaro, the director of the Securities Arbitration Clinic at the St. John's University School of Law, said last week during a session for client attorneys at the annual conference of the Public Investors Advocate Bar Association.
Reg BI opens the door for regulators and client attorneys to probe whether advisors have abided by the provisions calling for them to have a "reasonable basis" for recommending a product, said Israels & Neuman attorney David Neuman.
"The broker and the brokerage have to know what they're selling," he said. "There's going to have to be due diligence done. When you are getting a case in the door, you might not be able to find out that information. That would likely be determined during discovery."
In terms of brokerage exams conducted by FINRA's staff, the regulator views a firm's training as "a really big part" of Reg BI and "whether you have a culture of compliance," according to Associate General Counsel Jim Wrona. The regulator will be looking for signals out of firms' C-suites that they are striving to act in clients' best interest, Wrona said.
"I'm a big believer that you can really tell from the top and from the training what you're gonna get out of a firm," he said of FINRA's examinations of firms. "There are some firms that care deeply about their responsibility and there are some that don't. And I can look at the training and have a guess which ones are which."