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Thursday, August 10, 2006

ING BDs Fined Over Directed Brokerage

Reported by Sean Hanna, Editor in Chief

The NASD slapped four broker-dealer affiliates comprising the ING Advisors Network with fines totaling $7 million as part of a crackdown on the use of directed-brokerage payments by fund firms. The move is the latest in a series of actions against both fund and brokerage firms that have forced fund firms to rethink how they pay brokerage firms for distribution.

The NASD has brought more than 30 enforcement actions for similar violations. Meanwhile, James S. Shorris, NASD executive vice president and head of enforcement, told Dow Jones Newswires that the SRO plans to bring an action involving "another kind of misdeed involving mutual fund sales" and the "retail seller" of the fund. He did not provide more details.

In the latest action, the NASD fined the four ING affiliates under its Anti-Reciprocal Rule, which prohibits arrangements in which brokerage commissions are used to compensate firms for selling mutual fund shares. The rule is also designed to ensure that execution of portfolio transactions is guided by the principle of "best execution" and not by other considerations.

The four firms that will pay the fines include:

  • Financial Network Investment Corporation, Inc. of El Segundo, CA. ($3.4 million)
  • ING Financial Partners Inc. of Des Moines, IA. (nearly $1.3 million)
  • Multi-Financial Securities Corporation, Inc. of Denver, CO. (more than $1.2 million)
  • Prime Vest Financial Services, Inc. of St. Cloud, MN., (more than $1 million)

    In settling with NASD, the ING broker-dealers neither admitted nor denied the allegations, but consented to the entry of NASD's findings.

    "The use of directed brokerage commissions from a mutual fund as an incentive towards the marketing or preferred treatment of those funds is an impermissible use of customer assets," said Shorris. "NASD will continue to pursue mutual fund sales practices that put the interests of firms ahead of the interests of customers."

    The action specifically claimed that ING Advisors Network's four affiliates provided "a host of marketing benefits" to the ten mutual fund firms that were in its Strategic Partners Program in exchange for millions of dollars of payments.

    The benefits provided to the funds included yearly sales goals, special placement on the ING firms' intranet websites, direct links to the websites of the participating fund companies, increased exposure to the registered reps of the ING firms, participation in annual national meetings, waiver of ticket charges for registered reps on sales of participants' funds, and other marketing opportunities.

    Eight of the 10 participating mutual fund complexes directed some $25.7 million in mutual fund portfolio brokerage commissions to the four broker-dealers as partial payment of their fees. The funds paid those commissions despite the fact that none of the brokerages played any role in the execution of the trades that generated the commissions, according to the NASD.

    The remaining two fund companies paid their fees in cash. 

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