Raymond James is asking a Florida court to toss out a lawsuit accusing it of "reverse-churning," a practice that the firm is accused of doing since at least 2005.
Kimberly Nguygen of Garland, Texas, is claiming Florida-based Raymond James moved her from a commission-based to a fee-based account even though she is a "buy and hold" investor who would require few, if any, trades. Nguyen filed her lawsuit in U.S. District Court for the Middle District of Florida in January, seeking class-action status.
In its motion asking the court to dismiss the claim, Raymond James Financial attorneys argue that Nguyen lacks Article III standing to bring the lawsuit, and that she improperly combined allegations against Raymond James Financial and Raymond James Associates "by defining these separate corporate Defendants as a single unit, 'Raymond James.'”
"The practice of 'group pleading,' by lumping multiple corporate defendants together, is disfavored by the courts," the motion said.
In addition, the thrust of Nguyen's claims are precluded by the Securities Litigation
Uniform Standards Act, RJA attorneys claim. Enacted in 1998, SLUSA extremely limits most securities fraud class actions based on state law, whether pursued in state or federal court.
"Plaintiff’s allegations involve a 'misrepresentation or omission of material fact' and a 'manipulative or deceptive device,' and otherwise meet all of the other requirements of SLUSA," the motion said. "In addition, Plaintiff’s common law claims are fundamentally flawed and barred by the independent tort doctrine."
RJA attorneys further argue that Nguyen failed to make a case for negliagence or breach of fiduciary duty. The motion was filed last week.
Fees Disputed
Nyguyen opened her commission-based account with Raymond James in June 2015, but in January 2016, her advisor advised her to transfer her assets to a fee-based Freedom Account, according to the complaint. She paid more than $7,432 in fees between 2016 and 2018, which the complaint said was “substantially” more than she would have spent in a commission-based account.
Although regulators and legislators regularly castigate the insurance and financial industries for exchanges primarily for commission, or “churning,” not as much attention has been focused on “reverse-churning,” or exchanging commission-based funds to fee-based accounts to increase broker revenue.
In fact, the claim accuses Raymond James of using federal regulation that was designed to control churning as an opportunity to reverse-churn.
“Raymond James has disclosed that a significant portion of that increase in assets came from existing clients,” according to the complaint. “For example, Raymond James provided in its 2017 Form 10-K that the increase in assets in Fee-Based Accounts was driven by ‘clients moving to fee-based alternatives versus traditional transaction-based accounts in response to the recently implemented DOL regulatory changes.’ Accordingly, plaintiff [Nyguyen] reasonably believes there are thousands, if not tens of thousands, of members in the proposed class.”
DOL Rule Meant To Curb Abuse
The U.S. Department of Labor’s fiduciary regulation was called the conflict of interest rule because the department argued that the existence of commissions and bonuses enticed agents and advisors to sell for their own benefit rather than the client’s. The Trump Administration shelved the rule in 2018.
One of the rule’s primary purposes was to prevent churning, such as when an annuity is exchanged for another one and incurs onerous expense for the client, or when a fee-based product is exchanged for a commission-based product.
“Ironically, the announcement of the Fiduciary Rule, a rule designed to protect investors, provided Raymond James with an external rationalization to accelerate that transition process based on compliance with the Fiduciary Rule even though the Company could have just as easily complied with the Fiduciary Rule without transitioning clients to Fee-Based Accounts,” according to the complaint. “However, Raymond James would have made less money if its clients stayed in commission-based accounts.”
Although the firm had announced that clients could keep their commission-based accounts under the fiduciary rule, the complaint alleges the firm encouraged representatives to move all clients to fee-based accounts regardless of suitability in violation of its own policy and FINRA regulations.
Not The First Time
Raymond James has been sanctioned in the past for similar practices.
In 2005, FINRA’s forerunner, the National Association of Securities Dealers fined the firm $750,000 for moving clients into fee-based accounts despite suitability, although the firm did not accept or deny the charges.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.
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