Administration August 6, 2005

NASD Slaps 15 Broker Dealers with Directed Brokerage Fines

June 8, 2005 (PLANSPONSOR.com) - The NASD announced has imposed fines totaling more than $34 million on 15 broker-dealers for taking directed brokerage payments for giving preferential treatment to certain mutual fund companies.
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In a  NASD news release , the agency said the firms violated a NASD ruling banning companies from favoring shares of certain funds based on the amount of brokerage commissions they received from the fund companies. The 14 retail firms operated “preferred partner” or “shelf space” programs that provided benefits to a relatively small number of mutual fund complexes in return for directed brokerage, according to the NASD.

The benefits to mutual fund complexes included higher visibility on the firms’ internal websites, increased access to the firms’ sales forces, participation in “top producer” or training meetings, and promotion of their funds on a broader basis than was available for other funds, the regulatory agency charged.

“When recommending mutual fund investments, firms must act on the basis of the merits of the funds and the investment objectives of the customers and not because of other benefits the brokerage firm will receive,” said NASD Vice Chairman Mary Schapiro, in the NASD statement. “NASD’s prohibition on the receipt of directed brokerage is designed to eliminate these conflicts of interest.”

Some of the fund complexes participating in the preferred partner programs paid part or all of the revenue sharing fees by the use of directed brokerage, directing a portion of the trades in the portfolios they managed to the trading desks of the firms participating in the program, according to the NASD.

NASD also censured and fined one mutual fund distributor, AllianceBernstein Investment Research and Management, Inc.  AllianceBernstein paid for some of its shelf space obligations by having its affiliated investment advisor direct portfolio transactions to or for the benefit of firms to which the distributor owed revenue sharing fees, according to the NASD.

NASD fines to the firms included:

  • Royal Alliance Associates – $6,600,000
  • H.D. Vest Investment Services – $4,015,000
  • AllianceBernstein Investment Research and Management – $3,984,087
  • Linsco/Private Ledger Corp – $3,602,398
  • Wells Fargo Investments – $2,970,000
  • SunAmerica Securities – $2,500,000
  • FSC Securities Corp – $2,400,000
  • Securities America – $2,400,000
  • RBC Dain Rauscher – $1,700,000
  • McDonald Investments – $1,500,000
  • AXA Advisors, LLC – $900,000
  • Sentra Securities Corporation and Spelman & Co. (joint fine) – $780,000
  • Advantage Capital Corp – $450,000
  • Advest – $286,415

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