NASD Fines Reach Record Levels

By Bruce Kelly
January 16, 2006

NEW YORK - NASD members are paying much more in fines than ever before.

The Washington-based self-regulatory organization last year collected a record amount in disciplinary fines, hitting the brokerage industry with$125.4 million for a range of violations, including abuses in sales of mutual funds and variable annuities. The amount in fines is an increase of 21% over the amount in 2004.

The 2005 number represents a huge increase over those of 2002 and 2003, when NASD collected $68.2 million and $33.3 million, respectively, in fines.

Over the past four years, however, the number of cases the association resolved against its member broker-dealers has remained fairly steady.In 2005, NASD resolved 1,296 formal actions against its members, compared with 1,129 in 2002.

Not likely to shrink

Total fines collected have increased 84% over the past four years, but the number of cases has risen only 15%.

And NASD fines are not likely to be reduced in the near future, one industry attorney said.

"It certainly indicates that NASD has been taking some of the [playbook]" from the Securities and Exchange Commission and increased the size of its penalties, said Terry Lister, chief regulatory officer at Waddell & Reed Financial Inc. of Overland Park, Kan. The SEC also has increased its penalties, he said.

Mr. Lister added that fines constitute a significant part of the regulator's revenues, particularly as it has prepared to cut its financial ties with The Nasdaq Stock Market Inc. of New York.

NASD saw a number of large fines in 2005. It brought more than 120 disciplinary actions involving deceptive market timing, late trading, unsuitable sales of mutual fund Class B and C shares, and impermissible revenue sharing, it said in its year-end review of fines and penalties.Since 2000, NASD has taken more than 400 actions involving mutual funds.

And it fined six leading firms more than $40 million for unsuitable B and C share sales.

Those firms were: Citigroup Global Markets Holdings Inc., Chase Investment Services Corp. and Merrill Lynch & Co. Inc., all of New York; American Express Financial Advisors Inc. - now Ameriprise Financial Services Inc. - of Minneapolis; Wells Fargo Investments LLC of San Francisco; and Linsco/Private Ledger Corp. of Boston and San Diego.

Preferential treatment

In directed brokerage and revenue sharing, NASD settled 27 cases against retail firms for giving preferential treatment to select mutual funds in exchange for brokerage business - a violation of the anti-reciprocal rule, according to the regulator. In the largest settlement, Ameriprise Financial Services was fined $12.3 million. The other 26 broker-dealers paid a total of $55 million in fines.

NASD said that it brought 11 cases against firms for facilitating deceptive market timing in mutual funds or variable annuity subaccounts and for failing to have procedures in place to prevent late trading of mutual funds. Two of the largest cases involved a $1.5 million fine against ING Funds Distributor LLC of Scottsdale, Ariz., and a $1.2 million fine against Janney Montgomery Scott LLC of Philadelphia.

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