NASD's NAC Fines and Suspends Broker and Orders Restitution for Unsuitable Sales Of Over $2.1 Million of Class B Mutual Fund Shares
Washington, D.C. — NASD's National Adjudicatory Council (NAC) upheld an NASD Hearing Panel's decision that Wendell D. Belden made unsuitable sales of Class B mutual fund shares. Belden is the sole owner of Southmark, Inc. based in Tulsa, OK. He was fined $40,000, suspended in all capacities for one year and ordered to pay restitution of $55,567, plus interest. Belden was also ordered to requalify as a principal by examination, and assessed costs of the proceeding.
The NAC determined that a registered representative's suitability obligation includes the requirement to minimize the sales charges paid for mutual fund shares, when consistent with the customer's investment objectives. In this case, the NAC found that the recommendations were unsuitable because the purchase of Class B shares, instead of Class A shares of the same fund resulted in significantly higher commission costs, including the payment of a contingent deferred sales charge upon the sale of the shares.
Specifically, Belden recommended and sold more than $2.1 million in Class B shares rather than A shares to his customer, a retired individual. While Class A shares typically involve a front-end sales charge, these fund shares incur lower ongoing charges and there is no contingent deferred sales charge upon the sale of the shares. Class B mutual fund shares generally do not incur a front-end sales charge, but are subject to higher ongoing charges and a contingent deferred sales charge upon the sale of shares. In this case, the customer purchased shares in two mutual fund families. The amount invested in one fund family was more than $1 million dollars, which would have entitled the customer to purchase Class A shares with no front-end sales charge. The customer's investment in the second fund family was over $800,000, which would have entitled the customer to receive the largest discount on the front-end sales charge offered by the fund.
The NAC stated that over an eight-year period the ongoing fund charges for Class B shares would have been 64 percent higher than the same charge for Class A shares. The NAC also found that Belden placed his customer in Class B shares to generate higher commissions for himself and explained that its finding was bolstered by Belden's statement that he could not stay in business if he had to rely on the lower commissions from the sale of Class A shares. In this case, Belden and his employer firm earned commissions on the sale of B shares of $84,000. The commissions on the sale of A shares would have only been $28,000.
Belden appealed a Nov. 12, 2001, hearing panel decision that imposed a 90-day suspension along with the monetary sanctions affirmed by the NAC. The NAC increased the suspension because, "Belden intentionally favored his financial interest to the detriment of one customer. . ."
Investors can obtain more information about multi-class mutual funds in an NASD Investor Alert, "Understanding Mutual Fund Classes," available at www.nasdr.com/alert_12-02.htm.
The NAC is a 14-person committee composed of seven industry and seven non-industry members that decides appeals from disciplinary, membership, and exemption decisions; rules on statutory disqualification applications; and advises on other policy matters. Before being appealed to the NAC, the case was heard by an NASD Hearing Panel. A Hearing Panel consists of an NASD Hearing Officer along with two members of the securities industry. Respondents have a right of appeal from a NAC decision to the U.S. Securities and Exchange Commission.
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