FINRA Proposes New Rule to Make Brokerage Fees More Transparent to Customers

The Financial Industry Regulatory Authority (FINRA) has recently sponsored a new securities industry rule that makes the information included on customer account statements more transparent.  Transparent commissions will likely lower the total up-front commissions a broker can collect on certain popular securities as investors realize the steep fees they are paying.

Nontraded real estate investment trusts (REITs) are among the most popular investment products sold by registered representatives and their broker-dealers.  Typically sold for less than $10 per share, the commission to a rep and the firm in this $1.4 billion “alternative investment” sector of the retail investment market is 7%, though the amount that goes toward the total upfront commission is split amongst several different players involved in selling the REIT.  A problem for investors is that their account statements do not clearly show the breakdown of those commissions or the estimated per-share valuation of their investment — something that the current rules do not require be revealed to them until 18 months after the REIT sponsors stop raising funds.

Under FINRA’s proposed new rule, the time frame in which broker-dealers will have to show investors a true valuation of such purchases will be drastically sped up.  By accelerating that timetable, investors will be provided quicker and much greater transparency in seeing the commissions being charged to them; and industry experts anticipate that broker-dealers are likely to lower the fees they assess to investors on such alternative investments.  Both nontraded REITs and illiquid private placements known as “direct participation programs” (DPPs), which would also fall directly under this new rule, have frequently been criticized for high commissions.

LPL Financial’s Chief Financial Officer — a leading seller of nontraded REITS — recently stated that the anticipated effect of the proposed FINRA rule would lower a customer’s upfront fees and would bring those products in line with other investment products such as mutual funds and variable annuities.  However, while reducing the upfront load on investors, firms such as LPL Financial are likely to get more creative in how they assess long-term charges to clients.  For example, broker-dealers can simply add a commission “trail” paid out over a period of years that, while decreasing the initial cost to investors, makes up for that initial cost savings by adding charges over the long haul of the investment.  Investors are cautioned to look not just at the initial reduction in costs this new FINRA rule is anticipated to spur but the overall costs assessed to them by creative broker-dealers through which they invest in products such as nontraded REITs and DPPs.

If you have questions about your legal rights, or have been the victim of investment fraud, please contact Scott Silver of the Silver Law Group for a free consultation at ssilver@silverlaw.com or Toll Free at (800) 975-4345.