NASD Fines Four Firms for Supervisory Failures Relating to Mutual Fund Sales Charge Waivers
Washington, D.C. — NASD announced today that it has imposed fines totaling $850,000 against four firms - Edward D. Jones & Co., L.P. of St. Louis ($250,000), RBC Dain Rauscher Inc. of Minneapolis ($250,000), Royal Alliance Associates, Inc. of New York ($250,000), and Morgan Stanley DW Inc. of New York ($100,000) - for failing to have adequate supervisory systems and procedures to identify opportunities for investors to purchase Class A mutual fund shares at net asset value (NAV), or without a front-end sales charge.
Each firm was ordered to provide remediation to thousands of eligible clients who qualified for, but did not receive, the benefit of available NAV transfer programs. Based on estimates provided by each firm, Edward Jones will pay $25 million, plus interest; RBC Dain Rauscher will pay $6.8 million, plus interest; Royal Alliance will pay $1.6 million, plus interest;; and Morgan Stanley will pay $10.4 million, plus interest. Each firm is required to retain a third party examiner to oversee the remediation process.
"The failures on the part of Edward Jones, RBC Dain Rauscher, Royal Alliance, and Morgan Stanley to adequately supervise the identification and implementation of NAV transfer programs deprived their customers of substantial discounts on mutual fund purchases," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "Securities firms must learn all of the relevant pricing features of the fund shares they sell and ensure that eligible investors receive all available discounts and sales charge waivers, without exception."
During 2002 - 2004, many mutual fund families offered NAV transfer programs that eliminated front-end mutual fund sales charges for certain customers. Under an NAV transfer program, customers who redeem fund shares for which they paid a sales charge are permitted to use those proceeds within prescribed time periods to purchase Class A shares of a new mutual fund at NAV — that is, without paying another sales charge.
NASD found that each firm during the relevant period failed to have systems reasonably designed to ensure that customers received NAV pricing when appropriate. As a result, certain investors purchased Class A shares and incurred front-end sales charges that they should not have paid, or purchased other mutual fund share classes that subjected them to higher fees and the potential of contingent deferred, or back-end, sales charges.
In sanctioning Morgan Stanley, NASD considered the firm's prompt and comprehensive remedial actions. Subsequent to the commencement of NASD's investigation, Morgan Stanley promptly assessed the extent of customer harm and began the process of identifying investors to make restitution. The firm's remediation program included a review of purchases in 2001 as well as purchases during 2002 through January, 2005.
In settling these matters, each firm neither admitted nor denied the charges, but consented to the entry of NASD's findings.
NAV transfers are explained more fully in an NASD Investor Alert, Net Asset Value Transfers: Look Before You Leap Into Another Mutual Fund.
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 2005, members of the public used this service to conduct more than 4.3 million searches for existing brokers or firms and requested more than 194,000 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.
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 www.nasd.com.