Eight US Firms Charged With Directed Brokerage Violations

by Glen Shapiro, LawAndTax-News.com, New York

13 October 2005

The US National Association of Securities Dealers announced on Monday that it has fined eight broker-dealers - including seven retail firms and one mutual fund distributor - more than $7.75 million for directed brokerage violations.

The sanctions announced this week are the latest actions resulting from an NASD enforcement sweep focusing on the receipt or payment of directed brokerage in exchange for preferential treatment for certain mutual fund companies.

All of the cases involve violations of NASD's Anti-Reciprocal Rule, which prohibits firms from favoring the sale of shares of mutual funds on the basis of brokerage commissions received by the firm. Among other things, the rule prohibits a firm from recommending funds or establishing preferred lists of funds in exchange for receipt of directed brokerage.

NASD found that the seven retail firms operated "preferred partner" or "shelf space" programs that provided benefits to specific mutual fund complexes in return for directed brokerage. The benefits to the mutual fund complexes included, in various cases, higher visibility on firms' internal websites, including inclusion on internal lists identifying the funds as participants in the programs; increased access to firms' sales forces; participation in "top producer" or training meetings, and promotion of the preferred funds on a broader basis than was available for other funds.

The mutual fund complexes that participated in these programs paid extra fees for the preferential treatment they received, which were usually calculated based on a combination of sales and/or assets under management by the brokerage firm.

"We continue to pursue conduct which puts the interests of firms ahead of the interests of customers," Barry Goldsmith, NASD Executive Vice President and Head of Enforcement announced, continuing: "NASD's prohibition on the receipt of directed brokerage is designed to eliminate these conflicts of interest in the sale of mutual funds, whose costs are paid not by the mutual fund company, but by the funds' shareholders."

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