The NASD on Wednesday last week fined 15 retail brokerage firms a total of $34 million for giving certain mutual funds special treatment in exchange for getting brokerage business from the funds.
Such arrangements – known as “directed brokerage” and “shelf space” deals – have attracted considerable regulatory scrutiny since the market timing scandal hit the $8 trillion US mutual fund industry two years ago.
The SEC adopted a rule in August barring directed brokerage, which detractors say encourages brokers to steer clients into funds with fat commissions rather than high performance. “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,” NASD Vice Chairman Mary Schapiro said in a statement. “NASD’s prohibition on the receipt of directed brokerage is designed to eliminate these conflicts of interest.”
NASD fined H.D. Vest Investment Services $4 million; Linsco/Private Ledger Corp., $3.6 million; Wells Fargo Investments LLC $3 million; RBC Dain Rauscher Inc. $1.7 million; Securities America Inc. $2.4 million; McDonald Investments Inc. $1.5 million; AXA Advisors LLC$900,000; and AXA affiliate Advest Inc., $286,415.
The regulator said it also fined several affiliates of insurer American International Group (: Royal Alliance Associates Inc., $6.6 million; SunAmerica Securities Inc., $2.5 million; FSC Securities Corp., $2.4 million; Advantage Capital Corp., $450,000; and, in a joint fine, Sentra Securities Corp. and Spelman & Co. Inc., $780,000.
One mutual fund distributor – AllianceBernstein Investment Research and Management Inc. – was fined $4 million for dealings related to shelf-space obligations, NASD said.
The firms settled with the NASD and neither admitted nor denied wrongdoing.