NASD Fines Ameriprise Financial Services $12.3 Million for Directed Brokerage Violations
Washington, DC - NASD announced today that it has fined Ameriprise Financial Services, Inc. of Minneapolis, MN, $12.3 million in connection with its receipt of directed brokerage in return for providing preferential treatment to certain mutual fund companies. The conduct at issue occurred when the firm was known as American Express Financial Advisors. The Securities and Exchange Commission (SEC) has also sanctioned the firm for related conduct.
The action announced today involves violations of NASD's Anti-Reciprocal Rule, which prohibits firms from favoring the sale of shares of particular 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.
"This case demonstrates that NASD will remain vigilant in its efforts to eliminate conflicts of interest in the sale of mutual funds," said Barry Goldsmith, NASD Executive Vice President and Head of Enforcement. "NASD's Anti-Reciprocal Rule is an important regulatory tool that is designed to ensure that firms recommend mutual funds on their merits and not because of the receipt of brokerage commissions, which are assets of the mutual fund shareholders and should not be used for marketing purposes."
NASD found that from January 2001 through December 2003, Ameriprise operated two shelf space (or revenue sharing) programs in which participating mutual fund companies paid a fee in return for preferential treatment by Ameriprise. That treatment included enhanced access to Ameriprise's sales force, including participation in conferences and meetings, distribution and display of marketing materials at Ameriprise branches, and in-office visits with Ameriprise registered representatives - all designed to increase sales of those mutual funds.
In addition, Ameriprise promoted the funds on its internal website, identifying the mutual funds as "Preferred Providers," and posted sales literature for the funds as well as information about the funds and their fund managers. Ameriprise also charged its advisors reduced sales ticket charges for the sale of Preferred Provider funds. None of these benefits were available to non-participating mutual funds. While Ameriprise sold funds offered by approximately 32 fund companies during the period at issue, 24 were Preferred Providers.
The mutual fund complexes that participated in these programs paid extra fees for the preferential treatment they received. Seven of the 24 fund complexes paid their fees for participating in the programs by directing approximately $41 million in mutual fund portfolio brokerage commissions to Ameriprise. The funds accomplished this by directing portfolio trades to the trading desks of clearing firms designated by Ameriprise, and the clearing firms then remitted a portion of the trading commissions - generally 75 to 86 percent - to Ameriprise, the designated "introducing broker." The commissions paid under these arrangements were sufficiently large to pay for the preferential treatment and other benefits received by the funds as well as the costs of trade execution. This 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. The remaining fund complexes paid their fees for participating in the Preferred Provider program in cash to Ameriprise.
NASD acknowledges the assistance of the Midwest Regional Office of the SEC in investigating this matter.
In settling with NASD, Ameriprise neither admitted nor denied the allegations, but consented to the entry of NASD's findings.
NASD has brought 29 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 for existing brokers or firms and requested more than 190,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
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