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NASD Acts On Brokerage Commission Allegations

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The National Association of Securities Dealers Inc., Washington, is weighing in on mutual fund compensation arrangements.[@@]

The self-regulatory agency is examining 10 to 20 companies in connection with allegations that they may have directed extra commissions to top sellers of certain funds or received extra commissions, according to Roger Sherman, an NASD senior vice president.

The NASD drew attention to the examinations by charging American Funds Distributors, New York, the principal underwriter and distributor of American Funds, in connection with allegations that the company directed about $100 million in brokerage commissions to top sellers of American Funds.

The NASD says it believes American Fund Distributors violated the NASD’s Anti-Reciprocal Rule by directing the payments to about 50 brokerage firms over a 3-year period. The NASD rule is designed to prevent situations in which brokerage commissions, which are assets of mutual fund shareholders, are used to compensate brokerage firms for selling funds’ shares.

The rule has been in effect since July 1973, Sherman says.

The NASD alleges that between 2001 and 2003, AFD calculated “target commissions” that it intended to direct to top sellers of its funds according to a formula based on the prior year’s sales.

AFD, according to the NASD, communicated the specific amount of a firm’s target commissions for the upcoming year and the fact that the amount was based on the prior year’s sales of American Funds. Typically, the NASD says, the commission was 0.1 percentage points to 0.15 percentage points of those sales. The NASD says American Funds discussed with those firms the benefits that it expected to receive, such as the inclusion of American Funds on the firms’ “preferred fund” or “recommended fund” lists and “enhanced access” to the firms’ sales representatives.

The NASD says AFD provided a chart for the trading desk of its parent, Capital Research and Management Company, New York, to keep track of transactions of the top retail firms. The trading desk would provide monthly updates about brokerage commissions directed to top-selling retail firms, the NASD says.

For about 30 companies that did not have the capacity to execute securities transactions, “stepping out” arrangement with clearing firms that executed the trades and shared in the commissions provided a way for these smaller firms to earn target commissions, according to the NASD. The range of the $29 million in commissions paid to these firms was $112,000 to $5.4 million, the NASD says.

The range of commissions paid to firms that operated through the AFD trading desk was $500,000 to $11 million, the NASD says. The 20 firms that were paid through the AFD trading desk received a total of $71 million in target commissions, according to Sherman.

At press time, an AFD was preparing a statement but had not yet issued one, according to an AFD representative.


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