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Brokers regroup after mutual funds scandal
By Shannon Brigham
Contributing Writer
The Securities Exchange Commission and National Association of Securities Dealers Inc. recently announced they are taking disciplinary action against 15 brokers for failing to give investors breakpoint discounts on their mutual funds.
Six of the firms have offices in Charleston.
Breakpoint discounts are sales discounts given to investors on class “A” mutual fund shares with front-end sales loads. The discounts are applied when the amount invested reaches a certain level, or “breakpoint.”
“We estimate that for 2001 and 2002 alone, $86 million is owed to investors from the failure to award the breakpoint discounts, demonstrating just how critical it is that firms identify, remediate and take steps to prevent problems,” said Mary Shapiro, NASD vice chairman and president of regulatory policy and oversight, in a recent press release.
The 15 firms were targeted after NASD and the SEC, organizations that monitor the financial industry, conducted an investigation requiring brokerage firms to conduct self-analyses of their mutual fund transactions. These firms stood out because they either had a high percentage of failure rates or the dollar amount of overcharges was high.
The failures, whatever the cause, are not acceptable, said Shapiro.
“Most breakpoint problems did not appear to be intentional failures to apply sales load discounts,” said Elisse Walker, NASD executive vice president. “Rather, the failures were largely operational, such as the failure to combine qualifying accounts, as for example the account of an individual and his or her spouse.”
NASD also ordered more than 450 other brokerage firms to contact customers that purchased class “A” mutual fund shares since 1999 as they might have missed out on discounts because of a failure to notify them about their eligibility.
More than 170 other firms are currently conducting evaluations of individual mutual fund transactions.
“The financial planning community, by and large, does not appear to have been significantly affected,” says Wayne Cassaday, president of Battery Investment Co. and past chair of the S.C. Chapter of the Financial Planning Association. “The biggest issue for planners has been the additional paperwork from brokerage houses, new rules for operations and questions from concerned customers.”
The SEC also points out that firms should not purposely sell mutual funds in amounts that fall “just below” the breakpoint for a discount in order to increase their commission.
“I think the breakpoint discount scandal brings to light the importance of understanding how your adviser is compensated,” says Doug English, VP and financial adviser of CUNA Brokerage Services. “Although there are many good commissioned advisers, there are substantial issues with conflicts of interest that the public is only now coming to understand.”
The SEC recommends investors contact their brokers if they feel they are entitled to a discount. Investors should follow up with a letter if any questions remain and ask for a written response. The SEC also offers an online complaint form for consumers to use as a last resort.
NASD conducted a taskforce earlier this year to investigate and recommend new operational procedures for firms to implement to ensure this never happens again.
“The recent scandals, though deplorable, will in fact help improve the reporting and accountability of the mutual fund industry in the future,” Cassaday says.
NASD and the SEC fined the 15 firms more than $21.5 million in penalties and ordered them to correct policies and procedures regarding breakpoint charges.
“We view this as an industry-wide issue that regrettably affected some of our clients,” says Christine Walton, director of communications for UBS Paine Webber. “UBS began implementing new procedures nearly a year ago to clarify breakpoint eligibility, and began restoring affected accounts more than nine months ago. Client accounts will be restored for any overcharges that may have occurred.”
H. D. Vest Investment Securities Inc. also offered a public apology.
“We accept the findings of the SEC and NASD and apologize to those customers who were charged too much for our services or didn’t receive the kind of disclosure they deserved,” says H.D. Vest president Roger Ochs. “We are contacting those customers potentially impacted to explain how we’ll reimburse them for our error. We’ve made changes to our procedures that strengthen our controls and will help prevent this mistake from happening again.”
Legg Mason declined to comment, but referred the Business Journal to the “Investor Relations” area of its web site at www.leggmason.com.
All other firms did not respond to requests for comment.
SIDEBAR:
Firms settling with the SEC and NASD in separate actions:
Projected rates/Name of firm/Fine amount of missed breakpoints
Wachovia Securities LLC $4,844,465 28.77%
UBS Financial Services Inc. $4,621,768 30.03%
American Express Financial Advisors Inc. $3,706,693 29.70%
Raymond James Financial Services Inc. $2,595,129 31.78%
Legg Mason Wood Walker Inc. $2,315,467 34.61%
Linsco/Private Ledger Corp. $2,232,805 35.64%
H.D. Vest Investment Securities Inc. $ 725,216 33.39%
Firms settling with NASD only:
Bear, Stearns & Co. Inc. $280,469 52.00%
Lehman Brothers Inc. $123,882 59.96%
Cresap Inc. $ 99,458 88.48%
SWS Financial Services $ 66,468 89.69%
Kirkpatrick, Pettis, Smith, Polian Inc. $ 39,935 53.56%
Southwest Securities Inc. $ 36,971 89.02%
David Lerner Associates Inc. $ 32,711 64.88%
Brecek & Young Advisors Inc. $ 31,224 53.74%
Source: Securities and Exchange Commission
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