FINRA Orders an Additional Five Firms to Pay $18 Million in Restitution to Charities and Retirement Accounts Overcharged for Mutual Funds
BUSINESS WIRE 10:15 AM ET 10/27/2015
WASHINGTON--(BUSINESS WIRE)-- The Financial Industry Regulatory Authority (FINRA) announced today that it has ordered five firms to pay restitution estimated at more than $18 million, including interest, to affected customers for failing to waive mutual fund sales charges for eligible charitable organizations and retirement accounts. The following firms were sanctioned.
Edward D. Jones & Co., L.P. - $13.5 million in restitution Stifel Nicolaus & Company, Inc. - $2.9 million in restitution Janney Montgomery Scott, LLC - $1.2 million in restitution AXA Advisors, LLC - $600,000 in restitution Stephens Inc. - $150,000 in restitution
In July 2015, FINRA had ordered Wells Fargo Advisors, LLC; Wells Fargo Advisors Financial Network, LLC; Raymond James & Associates, Inc.; Raymond James Financial Services, Inc.; and LPL Financial LLC to pay restitution for similarly failing to waive mutual fund sales charges for certain charitable and retirement accounts. Collectively, an estimated $55 million in restitution will be paid to more than 75,000 eligible retirement accounts and charitable organizations as a result of those cases and the cases announced today.
Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, "These actions are further evidence of our commitment to pursue substantial restitution for adversely affected mutual fund investors who were not afforded the full benefit of available sales charge waivers. Cooperation credit was granted to those firms that were proactive in identifying and remediating instances where their customers did not receive applicable discounts."
Mutual funds offer several classes of shares, each with different sales charges and fees. Typically, Class A shares have lower fees than Class B and C shares, but charge customers an initial sales charge. Many mutual funds waive their upfront sales charges on Class A shares for certain types of retirement accounts, and some waive these charges for charities.
FINRA found that although the mutual funds available on the firms’ retail platforms offered these waivers to charitable and retirement plan accounts, at various times since at least July 2009, the firms did not waive the sales charges for affected customers when they offered Class A shares. As a result, more than 25,000 eligible retirement accounts and charitable organizations at these firms either paid sales charges when purchasing Class A shares, or purchased other share classes that unnecessarily subjected them to higher ongoing fees and expenses.
FINRA also found that Edward Jones, Stifel Nicolaus, Janney Montgomery, AXA and Stephens failed to adequately supervise the sale of mutual funds that offered sales charge waivers. The firms unreasonably relied on financial advisors to waive charges for retirement and eligible charitable organization accounts, without providing them with critical information and training.
In concluding these settlements, Edward Jones, Stifel Nicolaus, Janney Montgomery, AXA and Stephens neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2014, members of the public used this service to conduct 18.9 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA's Disciplinary Actions Online database. Investors can also call FINRA’s Securities Helpline for Seniors at (844) 57-HELPS for assistance or to raise concerns about issues they have with their brokerage accounts and investments.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.
Visit MarketWatch all week for more stories from our "Bubble 2.0?" series, which revisits the dot-com bust of 15 years ago and examines the similarities, differences and lessons for investors today.
A decade and a half after the fall of Silicon Valley, a tech resurrection has conjured fears of another bubble.
Fears of a reversal of Silicon Valley's fortunes stem from scars formed in the fall and winter of 2000, when high- flying tech companies planned opulent holiday parties as their market values melted. By the time the bust reached bottom nearly two years later, the Nasdaq composite index had lost more than 75% of its peak value. Many investors and tech workers had lost everything.
Now, with the Nasdaq back above its dot-com peak, the number of billion-dollar startups exploding, and fresh imports arriving in San Francisco daily in search of opportunity, the anecdotal parallels are obvious. Just as the explosion of the Internet energized a personal-computer industry that had been building for more than a decade, the marriage of cloud architecture to the mobile revolution has spurred new optimism.
But those parallels don't necessarily presage another tech-stock bubble. Technology has invaded lives and businesses in many of the ways that were predicted in the last millennium, leading to a mature tech sector many observers say is too large and varied to fall to earth collectively as it did 15 years ago.
Enthusiasm has fueled rapid growth in two specific areas: cloud computing on the public markets, and tech startups, mostly focused on mobile, on the private side. They are the children of the dot-com bubble, but with sufficient support to avoid the same fate and, perhaps, forever change the way technology companies work.
"Tech companies may go up and down, but if you look at the whole sector itself, it's going to have to keep exploding," said technology economics expert Howard Rubin, founder and CEO of research company Rubin Worldwide (http:// rubinworldwide.com/rubinww.php). "This is the next frontier, and computing is the oil and coal of the technology economy."
How the cloud and mobile reinvented technology
The cloud -- in short, servers that host software and data for easy access from any device -- arrived in earnest around the time of Apple Inc.'s (AAPL) first iPhone in 2007, helping to spur adoption of smartphones and other mobile devices by both consumers and enterprises.
The distribution of software to the Internet made smartphones viable work devices, while the ability to tap remote servers gave developers the processing power to build and offer next-generation digital services. Netflix Inc. (NFLX), for example, would have had a much harder time ramping up its streaming service without it; same for Google's challenge to Microsoft Inc. (MSFT) through its Gmail and Docs services.
The most important change brought by cloud computing, however, might be in spending. The dot-com bubble was fueled by a hardware and software buying explosion as companies built and grew computer networks, but that spending was cyclical, and after people and companies bought what they needed, it crashed: U.S. technology spending by companies grew at a compound annual growth rate of 13% from 1995 to 2000, before falling to -3.5% over the next three years.
Since the end of 2003, however, technology spending growth has smoothed -- the 2009 economic crash notwithstanding -- and generally come in line with economic growth. Over the past 11 years, the mean growth rate has been about 4.3%, topping 7% only once and falling below 3% only in 2009. That, experts say, is influenced by cloud architecture, which has changed the nature of technology spending by orienting it toward services with recurring fees rather than one-time costs.
The cloud "takes what would have been up-front capital investment and turns it into operating expenses spread out over time," said Forrester Research Vice President Andrew Bartels, who focuses on trends in the technology market.
That essentially upends the traditional model for technology deals: A company that once would have paid $1 million to license software and $200,000 annually for services in later years will instead pay $300,000 for the first year, with expectations that the cost will grow over the years as more employees use the software or more options are added.
Companies that bet on cloud technology have seen businesses grow. Amazon's (AMZN) AWS division reached $2 billion in revenues in the third quarter, helping the company turn in its second consecutive profitable quarter after years of deficits. Cloud returns are also gaining for Microsoft. Both companies' stocks are at new highs (http:// www.marketwatch.com/story/amazon-now-worth-300-billion-alphabet-500-billion-after-earnings-explosions-2015-10-22).
Forrester predicts the public cloud will grow from a $58 billion business in 2013 to $191 billion in 2020, and James McQuivey, a Forrester analyst focused on digital disruption, believes the cloud transition may only be one-tenth complete, in part because large companies have been relatively slow to transition to cloud contracts because of concerns about data security.
"It feels to me like most of the big companies -- health care, financial services -- won't even touch cloud in more than a very limited way because they are under the impression that cloud is more dangerous than their existing systems," McQuivey said. "There is just so much left to do and so much innovation we won't even realize we need to do until we get further along on the path."
The fast growth rates and potential for those companies to make more money on the back end of deals have led investors to make big bets on companies that are struggling with profitability, however.
The lofty price-to-sales multiples awarded such companies as Salesforce.com (CRM) Inc. and Amazon, perhaps the largest cloud-services provider, could be seen as evidence of a narrow tech bubble in the public markets -- one Bartels says is "confined to 20 to 30 tech stocks that are primarily cloud-based," Bartels said. "But they are caught in a broader tech market that includes many traditional software and hardware vendors that don't have the high growth and are not overvalued in any sense at all."
And even if cloud-related companies' shares cannot sustain the levels their projected growth currently suggests, some say, the companies themselves are unlikely to go completely bust, as many did 15 years ago. And their decline will not lead to the wholesale downfall of the entire tech sector.
"The stock price for Amazon is not going to go to zero, like it did for Webvan or Pets.com, because they have real, legitimate revenue," Bartels said. "The price point might drop by 30%. But since you're talking about a potential 30% drop in, say 10% of the tech sector of the stock market, that's not going to have a major impact on portfolios overall."
More valuation risk for privately held companies
A correction in the valuations paid for private investments in startup technology companies, a concept being publicly discussed by the likes of venture capital investor Bill Gurley (http://recode.net/2015/10/20/benchmarks-bill-gurley-is- talking-to-you-unicorns-private-valuations-are-fake/) and Microsoft CEO Satya Nadella, (http://www.bloomberg.com/news/ articles/2015-10-21/microsoft-ceo-says-startup-overfunding-will-cause-correction) could be more drastic, however.
IPOs for so-called "unicorns"-- shorthand for privately held companies valued at at least $1 billion -- have dried up. Only 12 tech companies managed to go public in the first three quarters of 2015, the lowest percentage of the overall IPO market since before the dot-com bubble formed (http://www.wsj.com/articles/tech-startups-feel-an-ipo-chill- 1445309822). Nearly half of the companies that did make it to Wall Street failed to live up to their valuations (http:// www.reuters.com/article/2015/10/16/us-ipo-valuations-idUSKCN0SA09S20151016), indicating that the late-stage venture investments of recent years may have been overdone.
"The likelihood that we're reverting back to normal valuation metrics by the VCs is going to change the landscape," said Paul Boyd, managing partner of Clearpath Capital Partners (http://www.clearpathcapital.com/), an investment- advisory firm that serves tech executives in Silicon Valley, specializing in startup founders.
VCs are lately more concerned about the valuations given to early and late-stage investments and paying closer attention to the cash burn of the companies in their portfolios, according to Boyd and other market watchers. That may presage a slowdown in private investment over the next year as startups receive more scrutiny.
"We're going to have a series of companies that run out of cash. We're going to have a series of companies that end up accepting 'down rounds' for their next tranche of capital," Boyd said. (A "down round" is a round of financing that comes at a lower valuation than previous rounds.) "There's nothing wrong with that. That's the private market resetting itself."
While there would undoubtedly be economic effects, potentially localized in the San Francisco Bay area, such a slowdown would look very different from the dot-com bust, which took place largely in the public markets. The long fall of tech stocks in the early 2000s was especially painful because individual investors had fueled the runup with hard- earned capital.
"I don't see amateur investors bringing capital into the market because they're not seeing those crazy returns that we were seeing in 2000," McQuivey said. "What I do see is huge enterprises, not to mention special equity investors, sitting on cash they can't do anything with (http://www.marketwatch.com/story/apple-still-on-top-as-us-corporate-cash- holdings-reach-173-trillion-2015-05-07)."
Those enterprises could launch a spending spree if prices do decrease on public, cloud-focused companies and small startups. This year was already on pace to be a record year for mergers and acquisitions (http://www.wsj.com/articles/m- a-deal-activity-on-pace-for-record-year-1439249011) even before the largest deal in tech history was announced this fall (http://www.marketwatch.com/story/dell-to-buy-emc-for-67-billion-2015-10-12-71033436), but that could be just a start.
Companies like Apple, Cisco Systems (CSCO), Facebook Inc. (FB) and Alphabet Inc. (GOOGL), the recently restructured Google corporate entity that appears set up to acquire heavily, have record cash reserves and a thirst for top talent and technology.
"This boom has caused fewer and fewer players to be willing to sell because they felt there was upside on their own," said Boyd. "I think there's going to be a feeding frenzy with a lot of opportunity for [large technology] players to pick up the innovative smaller companies at lower prices and lower valuations."
"If things really got bad for the startup economy, that could be good for the hundreds of millions and billions that are sitting around under-utilized by these really big companies, not to mention for their investors," McQuivey said.
Consolidation could also happen on a lesser scale within the private markets. Venture capital firms with large portfolios could stem a startup's failure by orchestrating mergers with similar firms in which they have invested. Likewise, a public company heavily invested in cloud technology could buy a slower-growth tech company with established revenues to head off a valuation downturn. Or, as in the case of the Dell-EMC deal (EMC), legacy tech players in high- revenue, low-margin businesses could combine (http://www.marketwatch.com/story/dellemc-deal-is-a-wake-up-call-for-big- tech-2015-10-13) to head off a decline in the face of upstart challengers.
If enough money exchanges hands in mergers and acquisitions, a decline in valuations for a small subset of the public markets and privately owned startups might cause little pain outside Silicon Valley -- or, at least, nothing at the scale of the dot-com bust. And the companies that became standard-bearers in the late-90s boom and the years since could become safe havens for tech investors. Some of that era's giants, such as Cisco and Microsoft, are still well shy of the valuations reached early in the millennium.
Demand for technology products and services, meanwhile, is expected to increase. Rubin notes that technology spending worldwide has reached roughly $5 trillion, nearly 10% of global gross domestic product and more than the GDP of any nation except the United States and China.
As demand for technology increases from companies and consumers, consumption will increase, Rubin says. So while a short-term valuation decline in certain areas due to risky bets is possible, a replay of the dot-com bust or a derailment of technology's advance doesn't appear to be in the cards.
"As you look at the long-term trend, even though the dot-com bubble was painful, all of those promises that were made back then did actually pan out," said McQuivey. "It just took a trough -- and mobile -- for people to realize how valuable some of these digital services would be."
-Jeremy C. Owens; 415-439-6400; AskNewswires@dowjones.com
News 
Market Data 
Discover 
