NASD Settles Cases Against MML Investors Services, NYLIFE Securities, Securities America and Northwestern Mutual Investment Services for Fines Totaling over $1.2 Million for Failures Relating to Mutual Fund Sales
Washington, D.C. — NASD announced today that it has settled cases against four firms involving mutual fund sales violations.
NASD imposed a $473,000 fine against MML Investors Services, Inc., of Springfield, MA, and a $354,000 fine against NYLIFE Securities LLC, of New York, NY for improper Class B share sales. Securities America, Inc., of Omaha, NE was fined $322,000 for improper Class B and Class C share sales.
NASD also fined Northwestern Mutual Investment Services, LLC, of Milwaukee, WI, $100,000 for failure to have adequate supervisory systems and procedures to ensure that clients received Net Asset Value (NAV) pricing when appropriate under NAV transfer programs. MML's settlement included similar findings without a fine.
In resolving the Class B and Class C share cases, MML, NYLIFE and Securities America have agreed to remediation plans that cover over 10,200 transactions and at least 1,080 households.
In resolving the NAV cases, MML and Northwestern will provide additional remediation to customers who qualified for, but did not receive the benefit of, available NAV transfer programs. Total NAV remediation for MML, including remediation already paid to customers, is estimated at approximately $2.56 million. For Northwestern, total remediation is estimated at $2 million, in addition to the previous conversion of approximately $2.0 million in Class B shares to Class A shares. "The cases announced today are the result of NASD's continuing commitment to help ensure that sales of mutual funds - the investment product most commonly held by investors - are made appropriately and with the benefit of full consideration of all available share classes and pricing features," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "These firms failed to implement reasonable supervisory procedures to ensure that these considerations were addressed on a consistent basis."
Improper Sales of Class B and Class C Mutual Fund Shares
Class A shares generally charge a front-end sales charge and impose an asset-based sales charge that generally is lower than the asset-based sales charge imposed by Class B or Class C shares. Class B shares typically do not charge a front-end sales charge, but they do impose asset-based sales charges that are generally higher than those associated with Class A shares, and also impose a contingent deferred sales charge (CDSC) which the investor may pay at the time of sale. Class B share CDSCs generally decline over the time that an investor holds the shares and usually ultimately expire after a period of years, at which time Class B shares often convert to Class A shares. Class C shares usually do not impose a front-end sales charge upon purchase, but are often subject to a CDSC if sold within a short time of purchase, usually one year, and typically impose higher asset-based sales charges than Class A shares. Unlike Class B shares, Class C shares generally do not convert to Class A shares.
In recommending the purchase of mutual funds, a member firm must assess the suitability of the class of shares to be purchased as well as the suitability of the particular fund. Primary considerations include the investment amount, the expected term of the investment, the applicable sales loads, fees and expenses associated with each class and the effect of such factors on the ultimate return on investment to the investor. NASD found that, on certain occasions during January 2003 through July 2004, Securities America recommended and sold Class B and Class C share mutual funds and NYLIFE and MML recommended and sold Class B share mutual funds to their clients and did not adequately consider, on a consistent basis, the foregoing factors. These firms also had inadequate supervisory and compliance policies and procedures relating to these mutual fund sales.
Supervisory Failures Relating to Mutual Fund Sales Charge Waivers
MML and Northwestern were charged with failing to have adequate supervisory systems and procedures to identify opportunities for investors to purchase Class A mutual fund shares at NAV, without a front-end sales charge, and to ensure that all eligible investors received the benefit of available NAV transfer programs. During the period 2001 through 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 redeemed fund shares for which they paid a sales charge were 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 MML and Northwestern failed to have systems and procedures reasonably designed to identify opportunities for clients to purchase mutual funds at NAV and ensure that clients received the benefit of available NAV transfer programs when appropriate. As a result, certain investors who were eligible to purchase Class A shares under NAV transfer programs purchased Class A shares and incurred front-end sales charges that they should not have paid, and/or purchased other fund share classes that unnecessarily subjected them to higher fees and the potential of contingent deferred, or back-end, sales charges.
NASD imposed no fine against MML, however, for its failure to have an adequate supervisory system for its NAV transfer programs in light of MML's proactive remedial actions taken prior to NASD's detection of the violative conduct. MML discovered on its own that it failed to provide certain eligible customers with NAV pricing under available NAV transfer programs and proactively took prompt remedial action to investigate the situation and correct its system and procedures. As part of this process, MML conducted a self-review to identify clients who were eligible for, but did not receive, NAV pricing between 2001 and 2004 and paid more than $1.8 million in restitution to these clients.
NASD imposed a reduced fine of $100,000 against Northwestern in recognition of its prompt remedial steps after an NASD examination to assess client harm and provide remediation to eligible clients. Northwestern paid partial remediation of approximately $242,000 and converted approximately $2.0 million in Class B shares to Class A shares.
"We hope that NASD's decision not to fine MML for supervisory system violations related to its NAV program, and to reduce the fine for Northwestern, will encourage other firms to increase their efforts to proactively identify compliance problems, promptly assess and correct underlying supervisory deficiencies and timely compensate any customers harmed," Shorris said.
Each firm settled the matter without admitting or denying the allegations, but consented to the entry of NASD's findings.
For information about the differences in mutual fund share classes, see the NASD Investor Alerts Understanding Mutual Fund Classes and Class B Mutual Fund Shares: Do They Make the Grade? For information about breakpoint discounts on Class A share investments, see the NASD Investor Alerts Mutual Fund Breakpoints: A Break Worth Taking and Mutual Fund Breakpoints: Are You Owed A Refund?
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 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasd.com/brokercheck. 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.finra.org.