NASD Charges Eight Firms with Directed Brokerage Violations, Imposes Fines Totaling More Than $7.75 Million
Washington, DC — NASD announced today that it has fined eight broker-dealers - including seven retail firms and one mutual fund distributor - more than $7.75 million for directed brokerage violations. The sanctions announced today are the latest actions resulting from an NASD enforcement sweep focusing on the receipt or payment of directed brokerage in exchange for preferential treatment for certain mutual fund companies.
All of the cases involve violations of NASD's Anti-Reciprocal Rule, which prohibits firms from favoring the sale of shares of mutual funds on the basis of brokerage commissions received by the firm. Among other things, the rule prohibits a firm from recommending funds or establishing preferred lists of funds in exchange for receipt of directed brokerage.
"We continue to pursue conduct which puts the interests of firms ahead of the interests of customers," said Barry Goldsmith, NASD Executive Vice President and Head of Enforcement. "NASD's prohibition on the receipt of directed brokerage is designed 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."
NASD found that the seven retail firms operated "preferred partner" or "shelf space" programs that provided benefits to specific mutual fund complexes in return for directed brokerage. The benefits to the mutual fund complexes included, in various cases, higher visibility on firms' internal websites, including inclusion on internal lists identifying the funds as participants in the programs; increased access to firms' sales forces; participation in "top producer" or training meetings, and promotion of the preferred funds on a broader basis than was available for other funds.
The mutual fund complexes that participated in these programs paid extra fees for the preferential treatment they received. The additional fees were usually based on a combination of sales and/or assets under management by the brokerage firm. Certain complexes participating in the preferred partner programs paid part or all of the revenue sharing fees by the use of directed brokerage - that is, by directing commissions from trades in the portfolios they managed to the firms. This included a practice of directing trades to the trading desks of designated third parties, which then remitted a portion of the trading commissions to the retail firms named in these actions - although those retail firms provided no services in connection with the trades. The commissions paid under these arrangements were sufficiently large to pay for the preferred benefits received by the funds as well as the costs of trade execution.
The retail firms generally monitored the amount of directed brokerage received to ensure that the fund complexes were satisfying their revenue sharing obligations. The use of directed brokerage allowed the fund complexes to use assets of the mutual funds instead of their own money to meet their revenue sharing obligations.
NASD also censured and fined one mutual fund distributor, Lord Abbett Distributor LLC. Lord Abbett paid for some of its shelf space obligations by having its affiliated investment adviser direct portfolio transactions to or for the benefit of firms to which the distributor owed revenue sharing fees.
The firms and their respective fines are as follows (firms noted with asterisks are wholly owned subsidiaries of National Planning Holdings, Inc.):
|IFC Holdings, Inc.
d/b/a INVEST Financial Corporation*
|Commonwealth Financial Network||$1,400,000||Waltham, MA|
|National Planning Corporation Inc.*||$1,308,000||Santa Monica, CA|
|Mutual Service Corporation||$1,300,000||W. Palm Beach, FL|
|Lincoln Financial Advisors Corporation||$950,000||Ft. Wayne, IN|
|SII Investments, Inc.*||$658,500||Appleton, WI|
|Investment Centers of America, Inc.*||$363,500||Appleton, WI|
|Lord Abbett Distributor, LLC||$255,000||Jersey City, NJ|
The fine imposed on National Planning Corporation also included charges relating to violations of NASD rules relating to its use of non-cash compensation. During four months in 2002, National Planning Corporation, instead of giving equal weight to the sales of all mutual funds, as required by NASD rules, provided registered representatives with double production credits for sales of mutual funds offered by participants in its preferred partner program towards qualification for attendance at a rewards conference. The fine imposed on Commonwealth Financial Network included charges relating to its failure to retain emails as required by the federal securities laws and NASD rules.
NASD has brought 20 previous actions for similar violations.
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 2004, members of the public used this service to conduct more than 3.8 million searches and request almost 190,000 reports for existing brokers or firms. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (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 member firms. For more information, please visit our Web site at www.nasd.com.