NASD Regulation Levies Largest Advertising Fine Ever; Fundamental Service Corp. and Two Senior Executives Sanctioned
Washington, D.C.—NASD Regulation, Inc., today announced that it has fined Fundamental Service Corporation, Inc., and two senior executives a total of $125,000 for distributing more than one million copies of false and misleading advertising materials to investors nationwide in connection with the sale of one of its proprietary no-load mutual funds. This is the largest fine ever assessed by NASD Regulation in a case where the violations stem primarily from advertising and sales materials.
Fundamental, which neither admitted nor denied NASD Regulation’s findings, was also sanctioned for making misrepresentations to NASD Regulation’s Advertising/Investment Companies Regulation Department. As part of the settlement, Fundamental must pre-file all of its advertising and sales literature with the NASD Regulation for three years. The firm must retain, at its own expense, an outside consultant to review its procedures for two years.
The firm’s Vice President, Dr. Vincent J. Malanga, was fined $100,000 jointly with Fundamental; suspended for 30 days in all capacities; and required to re-take certain qualification examinations. He has also agreed not to apply for registration as a general securities principal for three years. Fundamental’s head of marketing, David P. Wieder, was fined $25,000 and suspended for 30 days in all capacities. He has also agreed not to apply for registration as a general securities principal as long as he remains associated with Fundamental. Wieder was also sanctioned for making misrepresentations to NASD Regulation’s Advertising/Investment Companies Regulation Department. In their settlements, Malanga and Wieder neither admitted nor denied NASD Regulation’s findings.
NASD Regulation found that from October 1992 through December 1994, the firm, along with Malanga and Wieder, marketed Fundamental’s U.S. Government Strategic Income Fund to hundreds of thousands of investors through direct mail advertising that dramatically overstated the fund’s safety and stability; omitted important risk disclosure and information on potential volatility; and materially misrepresented the nature of the portfolio.
Marketing materials emphasized the fund’s ability to offer high yields with maximum safety. In fact, the portfolio was comprised of risky and potentially volatile interest rate-sensitive securities, including mortgage-backed derivatives such as inverse floaters. The fund also used financial techniques, such as borrowing against its own assets and hedging strategies, that added to the overall risk of the portfolio. By the end of 1994, the fund lost more than 25 percent of its net asset value as a result of rising interest rates and the fund’s own volatile portfolio and aggressive investment strategies.
The advertising and sales materials included misleading statements such as: "So, for once you don’t have to sacrifice high yields for peace of mind" and "playing it safe was never so rewarding."
NASD Regulation also found that in certain cases, Fundamental, Malanga, and Wieder failed to file required advertising and sales materials with NASD Regulation. They also failed to establish, maintain, and enforce adequate supervisory procedures.
"With more new investors in the securities markets today than ever before, it’s especially important that advertising and sales materials be accurate and complete. Fully 88 percent of all investors now own shares in one or more mutual funds, up from 60 percent in 1990. As a result, it’s essential to the integrity of the marketplace that the information investors receive be accurate and complete," said Mary L. Schapiro, NASD Regulation President.
All NASD-registered brokerage firms must comply with NASD rules that require brokerage firm-distributed advertising and sales materials to be accurate and not misleading. NASD Regulation also reviews – either before or immediately after its first use – mutual fund advertising and sales materials produced by brokerage firms.
Fundamental, based in New York City, distributes fixed income mutual funds. The firm markets its products primarily through advertising and sales materials.
NASD Regulation oversees all U.S. stockbrokers and brokerage firms. NASD Regulation, and The Nasdaq Stock Market, Inc., are subsidiaries of the National Association of Securities Dealers, Inc. (NASD®), the largest securities-industry self-regulatory organization in the United States.
Investors can obtain the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999.