Spitzer Alleges Fraud in Lawsuit Against UBS for Fee Based Brokerage Accts.

December 20, 2006

New York Attorney General Elliot Spitzer announced a filing of a lawsuit against UBS Financial Services, Inc. for allegedly defrauding its customer through its fee-based brokerage program. Spitzer’s action alleges that fee-based brokerage accounts are inappropriate for investors who rarely trade securities or hold significant amounts of cash.

Although this lawsuit is focused upon a brokerage account, it raises interesting questions for investment advisors. Will the SEC and state regulators start questioning individuals that are dually licensed under an investment advisor and a broker-dealer whether an asset should have been held in a wrap account versus a commission-based account? If assets within an account are managed under an investment advisory agreement subject to an asset management fee but have few transactions, will the SEC challenge whether the fee is appropriate?

There doesn’t appear to be formal guidance with respect to these scenarios. However, it’s clear that an investment advisor can only charge a “reasonable” fee. Many commentators have interpreted this to mean that investment advisory fees above 3% of the account value on an annual basis are typically unreasonable (and receive intense regulatory scrutiny) and advisory fees above 2% will be subject to increased regulatory scrutiny. When charging a fee of 2% or higher, it’s recommended that an advisor disclose to the client that similar services can be attained for lower fees. The investment advisor must also be able to support/justify such a charge.

Posted by Bryan Hill
Labels: Enforcement