The NASD has fined 14 broker-dealers and one mutual fund distributor for accepting directed brokerage commissions from funds in exchange for shelf space or other special treatment. The total fines paid by the 15 firms were $34 million. The firms that settled neither admitted nor denied the charges, but consented to the entry of NASD's findings.

Officials at the NASD said that the case was brought as part of its efforts to eliminate conflicts of interest in the sale of mutual funds. Each of the settlements involved violations of NASD's Anti-Reciprocal Rule, said NASD officials. NASD has brought five previous actions for similar violations, including a complaint that is still pending against American Fund Distributors and settlements with Quick & Reilly, Inc., Piper Jaffray & Co., Edward D. Jones & Co. L.P. and Morgan Stanley DW Inc.

The directed brokerage commissions were payment for prominent "shelf space", which the NASD said 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 additional fees demanded by the distributors were typically based on a combination of sales and/or assets under management by the brokerage firm, according to NASD officials. Some of the complexes participating in the preferred partner programs paid part or all of the revenue sharing fees by the use of directed brokerage - that is, by directing a portion of the trades in the portfolios they managed to the trading desks of the firms participating in the program.

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

The firms, and the fines they paid, include:

Royal Alliance Associates, Inc.* $6,600,000 New York, NY

H.D. Vest Investment Services $4,015,000 Irving, TX

AllianceBernstein Investment Research and Management, Inc. $3,984,087 New York, NY

Linsco/Private Ledger Corp. $3,602,398 Boston, MA

Wells Fargo Investments, LLC $2,970,000 San Francisco, CA

SunAmerica Securities, Inc.* $2,500,000 Phoenix, AZ

FSC Securities Corp.* $2,400,000 Atlanta, GA

Securities America, Inc. $2,400,000 Omaha, NE

RBC Dain Rauscher, Inc. $1,700,000 Minneapolis, MN

McDonald Investments Inc. $1,500,000 Cleveland, OH

AXA Advisors, LLC $900,000 New York, NY

Sentra Securities Corporation* and

Spelman & Co., Inc.* (joint fine) $780,000 Phoenix, AZ

Advantage Capital Corp.* $450,000 Atlanta, GA

Advest, Inc. $286,415 Hartford, CT
-- * AIG affiliate

The fines imposed on eight of the firms - Royal Alliance Associates, SunAmerica Securities, FSC Securities Corp., Advantage Capital Corp., Sentra Securities Corp., Spelman & Co., RBC Dain Rauscher, and McDonald Investments - included charges relating to their failure to retain emails as required by the federal securities laws and NASD rules.

The fine imposed on H.D. Vest Investment Services included charges related to violations of NASD rules relating to non-cash compensation. H.D. Vest reimbursed brokers' expenses incurred in connection with certain firm training and educational conferences based, in part, on the brokers' sales of funds that participated in its preferred partner program - instead of giving equal weight to the sales of all mutual funds, as required by NASD rules.

H.D. Vest Investment Services, RBC Dain Rauscher, and McDonald Investments were also charged with violations of NASD's supervisory systems and procedures rule.

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 adviser direct portfolio transactions to or for the benefit of firms to which the distributor owed revenue sharing fees.  

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