NASD Brings Enforcement Action For Class B Mutual Fund Share Sales Abuses And Issues Investor Alert on Class B Shares
Washington, DC — NASD announced today that it has censured and fined McLaughlin, Piven, Vogel Securities, Inc. (MPV) and its Chairman a total of $100,000 for supervisory violations and unsuitable sales of Class B shares of mutual funds, and directed restitution of approximately $90,000 to customers. Additionally, NASD suspended MPV's Chairman James C. McLaughlin for a period of 30 business days in his capacity as a principal.
Today's action is part of a larger, ongoing focus of NASD on the sale of Class B mutual fund shares. In the last two years NASD has brought more than half a dozen significant enforcement cases involving sales violations of Class B shares.
NASD today also released an alert to investors warning them about the expenses involved in purchasing Class B mutual fund shares and how to determine which share class may be appropriate. Read Class B Mutual Fund Shares: Do They Make the Grade? . The alert also includes an expense analyzer that allows comparisons between two funds or classes of funds at one time, tells investors where the fees fall compared to industry averages, and highlights when investors should look for breakpoint discounts. Using NASD's Mutual Fund Expense Analyzer, investors can calculate and compare the expenses of Class A, B, or C shares or any other shares class offered.
"Today's enforcement action puts brokers on notice that investors must be sold an appropriate class of mutual fund, and our Investor Alert gives investors the tools to educate themselves about the costs involved when purchasing Class B shares," said Mary L. Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. "The information in today's alert allows investors to better protect themselves when purchasing mutual funds."
In the enforcement action, NASD found that from June 1998 through May 2002, MPV violated NASD's suitability rules by recommending purchases of large volumes of Class B shares of mutual funds in the accounts of 21 MPV customers totaling approximately $9.3 million. The large purchases of Class B shares deprived customers of the lower or potentially lower sales charges available through Class A shares of the same funds.
While Class A shares typically involve a front-end sales charge, these fund shares also typically 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 generally are subject to higher ongoing charges and a contingent deferred sales charge upon the sale of shares.
In one instance, a broker recommended the purchase of Class B shares of mutual funds in four different fund families for a single customer's account in lieu of the less costly Class A shares. The positions accumulated in these shares in each of the fund families ranged from $375,000 to $650,000.
NASD also found that MPV and its Chairman and supervisory principal, James C. McLaughlin, failed to establish, maintain and enforce an adequate supervisory system that would have detected and prevented the unsuitable large Class B share positions.
In settling this matter, MPV and McLaughlin neither admitted nor denied the allegations, but consented to the entry of findings. MPV also agreed to hire an independent consultant to review and recommend revisions to its supervisory system in connection with its investment company securities business.
Investors can obtain more information and the disciplinary record of any NASD registered broker or brokerage firm by calling (800) 289-9999 or by sending an e-mail through NASD's Web Site at www.nasdr.com.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors 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 member firms. For more information, please visit our Web Site at www.nasd.com.