The NASD has proposed that Edward D. Jones pay a $1.7 million fine and make restitution to customers to settle possible charges over alleged mutual fund sales abuses.
In its annual 10-K filing with the Securities and Exchange Commission, the St. Louis brokerage firm said it was notified in February that the agency would recommend an enforcement action over the sale of Class B fund shares.
The NASD argues that Edward Jones brokers sold B shares to many clients who would have been better off purchasing A shares, which carry upfront sales loads but offer breakpoint discounts for larger investments. The NASD also alleged that its oversight procedures with respect to the sale of B shares were "deficient."
The case is indicative of a larger trend in the fund industry whereby regulators have been scrutinizing the sale of B shares, which don't carry loads but impose fees on withdrawals that diminish over time.
As a result, the NASD has proposed a settlement that would include a $1.7 million fine, restitution for affected investors and the retention of an independent consultant. The NASD asked the firm to file a "Wells submission" setting forth its response and defenses to the allegations, according to the filing.
Edward Jones said it "has meritorious defenses to the allegations and intends to vigorously oppose the proposed recommendations."
Further defending its actions, Edward Jones said more than 90% of its mutual fund sales in 2004 were in A shares, a percentage it believes is among the highest in the industry. In addition, the company said it trains brokers primarily to sell A shares and pays them less to sell B shares.
The Missouri Securities Division has told Edward Jones that it recommended civil action against the firm by the state's Commissioner of Securities, the filing said. The company also revealed that state regulators would request sanctions against the company and certain individuals for lax oversight of revenue sharing and balanced portfolios. The company plans to fight this recommendation.
In December, Edward Jones agreed to pay $75 million to settle to resolve threatened charges that it failed to disclose that it received hundreds of millions of dollars in revenue-sharing payments from its "preferred family" of funds.
On top of that, Edward Jones is also currently facing nine class-action lawsuits and a civil action from California Attorney General Bill Lockyer over pay-to-play arrangements.