Fifteen US Brokerages Facing Fines Over Mutual Fund Kickbacks

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

10 June 2005

The US National Association of Securities Dealers (NASD) announced on Wednesday that it has imposed fines totaling more than $34 million on 15 broker-dealers in connection with the receipt 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 particular mutual funds on the basis of brokerage commissions received by the firm.

The securities industry regulator found that the firms in question, most of which sold funds offered by hundreds of different mutual fund complexes, operated "preferred partner" or "shelf space" programs that provided certain benefits to a relatively small number of mutual fund complexes in return for directed brokerage.

The benefits to mutual fund complexes of these quid pro quo arrangements included, in various cases, 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.

"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," explained NASD Vice Chairman Mary L. Schapiro on Wednesday, continuing:.

"NASD's prohibition on the receipt of directed brokerage is designed to eliminate these conflicts of interest."

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