NASD Fines Four ING Broker-Dealers $7 Million for Directed Brokerage Violations
Washington, D.C. — NASD today announced a total of $7 million in fines against four broker-dealers affiliated with ING America Insurance Holdings, Inc. (ING) in connection with the receipt of directed brokerage in exchange for preferential treatment for certain mutual fund companies.
The four broker-dealers are Financial Network Investment Corporation, Inc. of El Segundo, CA., which was fined over $3.4 million; ING Financial Partners Inc. of Des Moines, IA., which was fined nearly $1.3 million; Multi-Financial Securities Corporation, Inc. of Denver, CO., which was fined over $1.2 million; and Prime Vest Financial Services, Inc. of St. Cloud, MN., which was fined over $1 million.
NASD charged that the conduct by the four ING broker-dealers violated its Anti-Reciprocal Rule, which prohibits arrangements in which brokerage commissions are used to compensate firms for selling mutual fund shares. The rule is also designed to ensure that execution of portfolio transactions is guided by the principle of "best execution" and not by other considerations.
"The use of directed brokerage commissions from a mutual fund as an incentive towards the marketing or preferred treatment of those funds is an impermissible use of customer assets," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "NASD will continue to pursue mutual fund sales practices that put the interests of firms ahead of the interests of customers."
To date, NASD has brought more than 30 enforcement actions for similar violations.
NASD found that from 2001 through 2003, the four broker-dealers, which together constituted the ING Advisors Network, an umbrella business unit affiliated with ING, provided a host of marketing benefits to 10 mutual fund complexes that participated in the shelf-space (or revenue-sharing) program, known as the Strategic Partners Program. These benefits, which were generally not provided to non-Strategic Partners, included yearly sales goals, special placement on the ING firms' intranet websites, direct links to the websites of the participating fund companies, increased exposure to the registered representatives of the ING firms, participation in annual national meetings, waiver of ticket charges for registered representatives on sales of participants' funds, and other marketing opportunities.
In return, mutual funds paid the ING broker-dealers millions of dollars to participate in the Strategic Partner program. Eight of the 10 participating mutual fund complexes paid a portion of their fees by directing approximately $25.7 million in mutual fund portfolio brokerage commissions to the four broker-dealers, despite the fact that none of the firms played any role in the execution of the trades that generated the commissions. The remaining two fund companies paid their fees in cash.
In settling with NASD, the ING broker-dealers neither admitted nor denied the allegations, but consented to the entry of NASD's findings.
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.