NASD has imposed fines totaling USD850,000 against four firms – Edward D. Jones & Co., L.P. of St. Louis (USD250,000), RBC Dain Rauscher Inc. of Minneapolis (USD250,000), Royal Alliance Associates, Inc. of New York (USD250,000), and Morgan Stanley DW Inc. of New York (USD100,000), 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, 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 USD25 million, plus interest; RBC Dain Rauscher will pay USD6.8 million, plus interest; Royal Alliance will pay USD1.6 million, plus interest;; and Morgan Stanley will pay USD10.4 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,” says James S. Shorris, the Executive Vice President and Head of Enforcement at NASD. “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.