The NASD is continuing its crackdown on broker-dealers and fund firms that traded shelf space for trading commissions. While that is bad news, the silver lining for the industry is that this story is not catching the media's fancy in quite the same manner as 2003's Spitzer allegations even despite the growing appearance that the directed commissions at the heart of settlements were widespread.
Tuesday the NASD said it had agreed on settlements with another seven broker-dealers and one fund distributor. That announcement follows similar announcements on October 3 in which Janney Montgomery Scott, First Allied and ING Funds agreed to settle similar allegations.
Since last year the NASD says it has reached settlements with 20 fund firms and broker-dealers.
Still, so far the settlements have been covered by the financial media as isolated news events rather than part of a larger Web of industry practices. That coverage contrasts with the attention given to the late-trading and market-timing cases brought by Eliot Spitzer that inspired much deeper reporting.
Among the eight firms settling with the NASD on Tuesday were fund distributor Lord Abbett Distributors
and multiple broker-dealers, including four affiliates of Jackson National Life
, an U.S. based holding of Britain's Prudential PLC.
Jersey City, New Jersey-based Lord Abbett settled the shelf-space payment allegations by agreeing to a relatively small $225,000 fine. The NASD explained that Lord Abbett violated the anti-reciprocal rule when it paid for shelf space by having its affiliated investment adviser direct portfolio transactions for the benefit of brokerages to which it owed revenue sharing fees.
Meanwhile, seven broker-dealers also settled allegations of that they violated the same rule by agreeing to recommend funds or place funds on preferred lists of funds in exchange for receipt of directed brokerage.
Commonwealth Financial Network
(Waltham, MA) paid a $1.4 million fine, Mutual Service Corp.
(West Palm Beach, FL) agreed to a $1.3 million fine, and Lincoln Financial Advisors Corp.
(Fort Wayne, IN) agreed to a fine of $950,000.
Also, Jackson National Life affiliates settled the NASD's allegations by agreeing to fines totaling more than $3.8 million. Santa Monica-based affiliate National Planning Corporation Inc.
agreed to a $1.308 million fine. In turn, three of its own affiliates also settled with the NASD: Tampa-based IFC Holdings, Inc.
was fined $1.52 million, SII Investments
(Appleton, WI) was fined $658,500 and Investment Centers of America, Inc.
(Appleton, WI) was fined $363,500.
"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," said Barry Goldsmith
, NASD executive vice president and head of Enforcement.
Goldsmith said the NASD found that the seven broker-dealers provided "shelf space" for unidentified funds on their internal websites, including inclusion on internal lists identifying the funds as participants in the programs. They also gave the funds increased access to their sales forces and allowed the funds to participate in "top producer" or training meetings.
The mutual fund complexes purchased that placement by paying extra fees, usually based on a combination of sales or assets under management it gained through the brokerage firm.
In some cases, the fund firms paid part or all of the revenue sharing fees by directing commissions from trades in the portfolios they managed to the firms, a practice known as directed brokerage. The brokerages receiving the directed brokerage performed no services in connection with the trades.
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