|Wednesday, July 11, 2007
Nancy Condon (202) 728-8379
Herb Perone (202) 728-8464
In First Case of Its Kind, NASD Charges Former Securities America Broker with Misleading Union Retirement Plans About Receipt of More Than $280,000 in Improper Directed Brokerage Commissions, Other Payments
Washington, DC — In the first case of its kind, NASD announced today that it has fined Securities America, Inc. of Omaha, NE, $375,000 for improperly sharing directed brokerage commissions from a mutual fund company with Michael Bullock, a former Securities America broker in the Los Angeles, CA area. NASD also found that Securities America failed to adequately supervise Bullock's communications with his union-sponsored retirement plan clients to ensure that Bullock disclosed his additional compensation to those clients.
In a separate complaint, NASD charged Bullock with improperly receiving directed brokerage commissions and other compensation of more than $280,000. Bullock was also charged with misrepresenting and failing to disclose this compensation to his union retirement plan clients - at the same time he was advising those clients to maintain or include the fund company's mutual funds in the retirement plans they offered to working and retired union members.
"NASD will vigorously challenge all conduct that impermissibly compromises a broker's objectivity, especially when retirement money is at stake," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "In this case, Securities America approved Bullock's improper arrangement to receive directed brokerage commissions from mutual fund company portfolio transactions while advising his retirement plan clients to invest in this same mutual fund company's securities. This violation of NASD's rules governing mutual fund compensation, when coupled with the failure to disclose to the firm's clients the terms of his financial arrangement, made for an intolerable situation."
The actions announced today differ from previous disciplinary actions involving directed brokerage in several important respects. Previous actions involved firms receiving directed brokerage in exchange for providing "shelf space" for specific mutual funds - that is, promoting those funds to the investing public and among their own brokers in exchange for directed brokerage from those funds. In this case, the fund company directed brokerage specifically for the benefit of an individual broker - a first. NASD rules prohibit registered firms from granting a participation in directed brokerage to sales personnel. Also, the conflict of interest for the broker is heightened in this type of arrangement, compounding the seriousness of the violation.
NASD found in its settlement with Securities America, and alleged in its complaint against Bullock, that Bullock negotiated an arrangement with a mutual fund company to have thousands of dollars of brokerage commissions directed to him every month for his benefit. Bullock used the additional compensation to hire a sales assistant, formerly employed by the fund company, to help him find new retirement plan clients. Securities America approved the arrangement and for almost two years, from 2002 through 2003, Securities America received $420,000 in directed commissions from the fund company for Bullock's benefit. Securities America paid Bullock $262,500 and retained $157,500.
NASD further found and alleged that while Bullock was sharing in commissions generated by the fund company, all but one of Bullock's 15 union retirement plan clients included at least one mutual fund from the fund company in their plans. Bullock periodically met with his clients and advised them to select or maintain fund company securities in their "investment menus" - the platform of investment choices available to the individual plan participants, union members. However, Bullock failed to disclose that he was receiving substantial additional compensation from the fund company and misled clients regarding his remuneration and the directed commissions.
NASD found in its settlement with Securities America that the firm failed to take steps to ensure that Bullock describe and disclose to his customers the receipt of this additional compensation from the fund company. In one instance, the firm approved one of Bullock's misleading communications, despite its involvement in the directed commission arrangement that resulted in Bullock's conflict of interest.
NASD further alleged in its complaint against Bullock that, in addition to receiving over $260,000 in directed brokerage payments, Bullock also requested and received a $20,807.32 check directly from the fund company in 2002 - to reimburse him for some of the same expenses for which he was receiving directed commissions. The complaint alleges that Bullock concealed from Securities America that he received these funds.
In settling these matters, Securities America neither admitted nor denied the charges, but consented to the entry of NASD's findings.
Under NASD rules, a firm or individual named in a complaint can file a response and request a hearing before and NASD disciplinary panel. Possible remedies include a fine, censure, suspension, or bar from the securities industry, and disgorgement of gains associated with the violations. The issuance of a disciplinary complaint represents the initiation of a formal proceeding by NASD in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint. Because this complaint is unadjudicated, interested persons may wish to contact the respondent before drawing any conclusions regarding the allegations in the complaint.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.finra.org/brokercheck. Investors can also access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.finra.org.