NASD Probes Touting of Funds
Market regulator NASD is pursuing 12 investigations into whether brokerages promoted certain mutual funds in exchange for trading business, and expects to bring a major case soon against a brokerage, an NASD official said Thursday.
“We will be announcing a major case very shortly, in the next several weeks,” NASD Vice Chairman Mary Schapiro said in testimony before a congressional committee.
Some of the investigations by the NASD, formerly the National Assn. of Securities Dealers, are being conducted in cooperation with the Securities and Exchange Commission, Schapiro said.
Authorities declined to say which or how many brokerages had been targeted by the NASD and SEC probes, which are focused chiefly on a practice known as “directed brokerage.”
SEC enforcement chief Stephen Cutler told Congress this week that the agency is probing links between brokerages and mutual funds and has notified a major financial institution of a staff recommendation to take enforcement action.
Directed brokerage involves a mutual fund sending trading business to a brokerage in return for the brokerage giving more marketing support to shares in the fund. The support usually comes in the form of the brokerage putting the fund’s shares on a “recommended list” of mutual fund shares offered for sale to brokerage clients.
“It’s a quid pro quo,” Schapiro said. “It creates an incentive that’s not disclosed.... to push those particular funds.”
The NASD prohibits undisclosed directed brokerage. A source familiar with the inquiry said securities laws also could be involved.
This is the latest probe to come to light in the fast-moving mutual fund scandals, which mostly have revolved around market timing and late trading in fund shares -- trading practices that exploit mutual funds’ pricing systems.
Neither the SEC nor NASD has brought a directed brokerage case recently. But in mid-September, in a matter involving mutual fund sales practices, NASD fined Morgan Stanley $2 million for holding contests among its brokers to motivate them to sell the investment firm’s own mutual funds.
The NASD said the fine was the largest it had ever levied in a case involving mutual fund sales practices.
