NASD, the securities industry’s private sector regulator, has fined American General Securities, Inc. (AGSI), a member company of American International Group, Inc. (AIG) located in Houston, more than $1.1 million in connection with its receipt of directed brokerage in return for providing preferential treatment to certain mutual fund companies and for other violations.
The action involves 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. 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 remains committed to ensuring that firms comply with our rules in connection with the marketing and sale of mutual fund shares,” said NASD Executive Vice President and Head of Enforcement James Shorris. “The Anti-Reciprocal Rule is designed to ensure that firms recommend mutual funds on their merits and not because of the receipt of brokerage commissions, which are assets of the mutual fund shareholders and should not be used for marketing purposes.”
NASD found that from January 2002 through September 2003, AGSI operated a shelf space (or revenue sharing) program in which participating mutual fund companies paid a fee in return for preferential treatment by AGSI. That treatment included enhanced access to AGSI’s sales force, including being identified as a “Preferred Product Sponsor” on AGSI’s internal website, being featured in AGSI internal marketing publications distributed to its sales force, and participating in AGSI’s “top producer” or training meetings.
The benefits provided by the shelf space program were offered to only 12 mutual fund complexes during the relevant period. These fund companies paid extra fees for the preferential treatment they received. Three of the 12 fund complexes paid their fees for participating in the shelf space program by directing approximately $2.7 million in mutual fund portfolio brokerage commissions to AGSI. This use of directed brokerage allowed the fund complexes to use assets of the mutual funds instead of their own money to meet their revenue sharing obligations. The remaining nine fund complexes paid their fees in cash for participation in the program.
NASD also found that from July 2003 through September 2003, AGSI failed to promptly forward more than 2,100 customer checks that it had received in connection with certain mutual fund and variable annuity transactions; that from November 2001 through September 2003, AGSI failed to maintain electronic communications in violation of the books and records provisions of the federal securities laws and NASD rules; and, that it failed to establish and maintain a supervisory system and procedures that were reasonably designed to detect and prevent these violations.
In settling with NASD, AGSI neither admitted nor denied the allegations, but consented to the entry of NASD’s findings.
NASD has brought 30 previous actions for similar violations, including actions against six firms that are wholly owned subsidiaries of AIG Advisor Group, Inc, also an AIG-owned company.
Source: NASD at at www.nasd.com.
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