The NASD said on Wednesday that it has fined 15 broker-dealers more than $34 million in total for directing brokerage in exchange for preferential treatment for certain mutual fund companies.
The broker-dealers violated the NASD's Anti-Reciprocal Rule, which prohibits firms from favoring the sale of shares of particular mutual funds on the basis of brokerage commissions received by the firm. Also, a firm is not allowed to recommend specific funds to sales personnel or to establish preferred lists of funds in exchange for directed brokerage.
"When recommending mutual fund investments, firms must act on the basis of merits of the funds and the investment objectives of the customers and not because of other benefits the brokerage firm will receive," said NASD vice chairman Mary L. Schapiro.
"NASD's prohibition on the receipt of directed brokerage is designed to eliminate these conflicts of interest."
The broker-dealers censured by the NASD include: Royal Alliance Associates, H.D. Vest Investment Services, AllianceBernstein Investment Research and Management, Linsco/Private Ledger, Wells Fargo Investments, SunAmerica Securities, FSC Securities, Securities America, RBC Dain Rauscher, McDonald Investments, AXA Advisors, Sentra Securities and Spelman & Co., Advantage Capital, and Advest.
NASD found that the 14 retail firms, most of which sold funds offered by hundreds of different mutual fund complexes, operated "preferred partner" or "shelf space" programs that provided certain benefits to a relatively small number of mutual fund complexes in return for directed brokerage. The fund companies that directed brokerage commissions to the broker-dealers paid extra fees for enhanced visibility.