Beware of Dual Registrants Moving Securities to Drive up Fees 

FINRA says Dual Registrants may be Exploiting Clients with Commissions plus Fees 

According to Advisor Hub this week, The Financial Industry Regulatory Authority (FINRA) is reportedly keeping an eye on hybrid brokers and investment advisors who may be using their dual status to maximize the fees and commissions they receive from customers. FINRA is the self-regulator that oversees brokers and brokerage firms. 

According to Chris Kelly at FINRA’s annual conference this week, some dual registrants are selling a high-commission product in a brokerage account then rapidly converting that to an advisory account with an annual fee. These dual registrants may be moving securities back and forth between brokerage and advisory accounts to intentionally drive up fees. 

Kelly who reportedly called this process the “BD-IA Arbitrage” said it is likely only a “small number” of brokers engage in the practice, but it has recently come into focus with FINRA due to the big increase in dual registrants in 2023, according to Advisor Hub. Last year, the number of brokers also registered as investment advisors outnumbered broker-only for the first time. 

In one example, FINRA suspended a dual registrant in March for 18 months, with a $25,000 fine and$594,590 plus interest of restitution for recommending clients buy variable annuities in a brokerage account then quickly migrating them to fee-based accounts, according to Kelly.  

Gary M. Goldberg, a New York broker and investment advisor, allegedly recommended 54 customers buy annuities in their brokerage accounts even though advisory share classes of the product were available, according to his FINRA broker report. The annuities paid a 7% commission, plus an additional 1.875% annual fee on advisory accounts. Most of the switches were purportedly made within a day of the purchase, according to the self-regulator. 

The Securities and Exchange Commission is also focusing on conflicts of interest that dual registrants face. SEC noted in a risk alert earlier this year that said representatives needed to be clear with their customers and the fees and commissions they would be paying. 

Failure to Supervise   

All broker-dealers have a responsibility to adequately supervise its employees. They must ensure the necessary procedures and systems to detect misconduct.  Brokerage firms that fail to monitor the business activities of their employees may be liable for investment losses due to negligent supervision for the misconduct of their employees.   

When brokers violate securities laws, such as making unsuitable investments, the brokerage firm they are working with may be liable for investment losses through FINRA Arbitration.   

If your broker has defrauded you, you may be able to file a FINRA claim against your brokerage firm. FINRA arbitration can be a complex and technical process, and having an experienced attorney who is knowledgeable about securities law can greatly increase your chances of success.                

FINRA Attorneys   

The FINRA attorneys at the White Law Group can help you with the many aspects of the arbitration process including evaluating the merits of your claim and determining whether you have a strong case for arbitration.                

The White Law Group will draft the statement of claim and represent you at the arbitration hearing, present evidence and make arguments on your behalf. They may be able to negotiate a settlement for you before going to arbitration.     

If you have concerns regarding investments you purchased through a financial advisor and would like to speak with a securities attorney, please call The White Law Group at 888-637-5510.   

The White Law Group is a national securities arbitration, securities fraud, and investor protection law firm with offices in Chicago, Illinois.   

For more information on The White Law Group, visit www.whitesecuritieslaw.com.