The NASD last week fined eight broker/dealers, including one fund distributor, $7.75 million for giving preferential sales treatment to mutual funds in exchange for lucrative trading commissions from directed-brokerage agreements.
These are the latest actions resulting from an ongoing NASD enforcement sweep into violations of its anti-reciprocal rule that began with the regulator's broad inspection of the mutual fund industry 18 months ago, said James Shorris, senior vice president and deputy director of enforcement at the NASD.
"The announcement of this is an example of the fact that we continue to be vigorous in this area. We are absolutely committed to seeing these cases through," Shorris said.
Four of the companies are subsidiaries of National Planning Holdings, which collectively paid $3,850,000. They include Invest Financial, which paid $1,520,000; National Planning Corp., which paid $1,308,000; SII Investments, which was fined $658,500; and Investment Centers of America, which was penalized $363,500. Other companies charged included Commonwealth Financial, which was fined $1,400,000; Mutual Service Corp., fined $1,300,000; Lincoln Financial Advisors, fined $950,000; and Lord Abbett Distributor, fined $255,000.
The firms neither admitted nor denied the charges, but consented to the entry of NASD's findings, confirmed Herb Perone, a spokesman for NASD. He added that no individuals were named in the settlements.
The NASD's anti-reciprocal rule forbids firms from giving special treatment for the sale of mutual funds in return for trading commissions, or directed brokerage. The NASD found that the brokers operated "preferred partner" programs that gave the funds higher visibility on their Web sites and increased access to their sales forces, including participation in meetings of top producers.
"We continue to pursue conduct which puts the interests of firms ahead of the interests of customers," said Barry Goldsmith, NASD vice president and head of enforcement. "NASD's prohibition on the receipt of directed brokerage is designated to eliminate these conflicts of interest in the sale of mutual funds, whose costs are paid not by the mutual fund company, but by the funds' shareholders."
Lord Abbett, the fund distributor, was accused of paying three brokerages more than $900,000 in trading commissions to be included in their lists of recommended funds and on their internal Web sites. Lord Abbett also gained enhanced access to the dealers' sales teams through participation in broker training events, according to the NASD. Two of the companies received the commissions directly for carrying out the trades. The third company, which did not have a trading desk, split the payment with a clearinghouse that completed the trades in its place, according to the NASD.
The additional fees that the mutual fund companies paid to these brokerage firms were calculated on a mix of sales and/or assets under management by the brokerage firm. The NASD said these firms kept track of directed-brokerage business from the fund complexes to make sure they were adhering to their revenue-sharing obligations.
In addition, the NASD found that for four months in 2002, National Planning Corp. gave its registered representatives double credit for selling funds in its preferred partner program. The regulator also charged Commmonwealth Financial for failing to retain e-mails.
The NASD has been busy on the directed-brokerage front in recent months, fining 15 brokerages, including six subsidiaries of AIG, $34 million in June for these violations. Since it began its crackdown, some of its cases have been handled in conjunction with the Securities and Exchange Commission.
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