15 Brokerages Close to Deal on Fund Discounts
Fifteen brokerage firms accused of overcharging large-scale investors in mutual funds are expected to reach settlements with regulators that will require some of them to pay civil penalties totaling more than $20 million, a person familiar with the matter said Thursday.
Some of the settlements with the Securities and Exchange Commission and the National Assn. of Securities Dealers also will require the brokerages to make refunds to customers, the person said, speaking on condition of anonymity and confirming a news report. The firms include American Express Co., Raymond James Financial Inc. and Wachovia Corp., the source said.
The SEC and the NASD, the brokerage industry’s self-policing group, have found that brokerage firms -- apparently inadvertently -- often fail to give large-scale investors in mutual funds the discounts they are owed.
The so-called breakpoint discounts are required by NASD rules to go to investors in funds with upfront sales charges when they invest at high levels, typically $50,000, $100,000, $250,000, $500,000 and $1 million. Less than 7% of all mutual fund sales in 2002 involved upfront sales charges.
The regulators’ examination of the practice preceded and is separate from the widening investigation into trading and marketing abuses in the mutual fund industry, which are said to disadvantage ordinary investors. On Wednesday, the SEC moved closer toward banning payments by mutual fund companies to induce brokers to sell certain funds -- a practice critics say creates conflicts of interest and drives up investors’ costs.
Spokesmen for the SEC and the NASD declined to comment Thursday on the breakpoint settlements, which were first reported in the Wall Street Journal.
Seven of the 15 firms are expected to sign joint settlements with the SEC and the NASD that will include the penalties and refunds to customers, the person familiar with the matter said. They are American Express Financial Advisors; Legg Mason Wood Walker; Linsco/Private Ledger Corp.; Raymond James Financial Services; UBS Financial Services; H.D. Vest Investment Securities and Wachovia Securities.
Legg Mason disclosed Wednesday in a regulatory filing to the SEC that it would pay $2.3 million in civil fines and reimburse customers under a settlement. Raymond James has said it was in discussions with the SEC and the NASD and may have to reimburse customers as much as $14.8 million. Wachovia has said it probably failed to provide discounts worth $4 million to $5 million.
The other eight firms are expected to reach accords with the NASD only: Bear, Stearns & Co.; Brecek & Young Advisors; Cresap Inc.; Kirkpatrick, Pettis, Smith, Polian Inc.; Lehman Bros.; David Lerner Associates; Southwest Securities and SWS Financial Services.
Last year, an inspection “sweep” of 43 brokerage firms by the SEC, the NASD and the New York Stock Exchange found that brokers did not provide the required breakpoint discounts in nearly a third of transactions. The examiners found that most firms failed to provide the discounts in at least some instances.
