NASD Sanctions First Command Broker for Deceptive Conduct
Washington, DC — NASD announced today that it has imposed a 10-month suspension and a $25,000 fine against Louis E. Stough, a former broker with First Command Financial Planning Inc., in connection with a series of unsuitable recommendations and sales involving liquidation of investments in the firm's Systematic Investment Plans.
First Command is a Fort Worth, TX broker-dealer that specializes in sales to military personnel. Last December, NASD ordered First Command to pay $12 million dollars in fines and restitution for misleading statements in the sale of Systematic Investment Plans. To date, First Command has issued more than 8,000 restitution checks totaling over $3.6 million to affected customers, primarily active duty and retired military personnel. Restitution is expected to total approximately $5 million. NASD's Investor Education Foundation will use the remaining fine money to create investor education programs for the military.
Investors in Systematic Investment Plans purchase mutual funds through monthly contributions over a 10- or 15-year period, and are charged a sales load of 50% of the first year's contributions.
In the action announced today, NASD found that between August 2002 through January 2003, Stough recommended to 12 customers that they liquidate their Systematic Investment Plan investments and reinvest the proceeds in Class A shares of mutual funds. Stough failed inform those customers that they had the option of transferring assets directly from their Systematic Investment Plans to funds in the same mutual fund family without incurring sales charges. Instead, he recommended and sold them shares of other mutual fund families and charged them sales load of up to 5.75 percent.
"Brokers must consider sales charges when recommending that a customer move assets from one investment to another," said Barry Goldsmith, NASD Executive Vice President and Head of Enforcement. "Brokers must also consider the costs to the customer of moving investments from one mutual fund family to another. In this case, the broker acted improperly by failing to consider comparable options within a fund family that carried no sales charges and failed to disclose that option to his customers."
NASD also found that rather than having customers complete direct fund-to-fund rollovers as required by First Command's procedures, Stough instructed his clients to liquidate their Systematic Investment Plans, place the proceeds in a bank account, and then write a check from the bank account to purchase new mutual funds. Stough also failed to indicate in required documentation that the customer's money for the new purchases had come from Systematic Investment Plan liquidations. Instead, he labeled the source of the money as "bank IRA." As a result, these unsuitable transactions went undetected for approximately six months.
Stough's unsuitable recommendations and sales to the 12 clients involved 47 separate transactions that generated total commissions of more than $34,400 to First Command. Stough received $16,500 of that total. First Command has paid restitution to all affected customers, and Stough has returned his commissions to First Command.
Stough neither admitted nor denied NASD's charges, but consented to the entry of NASD's findings. Last December, when it settled NASD charges of making misleading statements and omitting important information when selling its Systematic Investment Plans, First Command neither admitted nor denied the charges, but consented to the entry of NASD's findings.
Detailed information on the First Command restitution program is available on NASD's Web site.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm through NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2004, members of the public used this service to conduct nearly 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 the program by going online to http://www.nasdbrokercheck.com/. Investors can also access this service by calling 1-800-289-9999.
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 registered firms. For more information, please visit our Web Site at http://www.nasd.com/.