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Industry Spotlight > Broker Dealers

NASD Imposes Military Sales Fines

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The National Association of Securities Dealers today fined 2 broker-dealers $400,000 in connection with allegations that they gave misleading investment plan sales literature to U.S. military personnel.

The fine is to be paid to the NASD Investor Education Program for the benefit of the military community, NASD officials said in announcing the settlement.

The issuance and sale of the new “systematic investment plans,” also known as periodic payment plans, were prohibited by Congress last fall as part of a crackdown on sales of insurance products considered unsuitable for service personnel on military bases. Previously sold plans remain in force, NASD officials said.

These plans typically require investors to make a fixed number of monthly payments over a 10- to 15-year period, NASD officials said.

The 2 dealers involved in the current enforcement action are Fidelity Investments Institutional Services Company Inc., Smithfield, R.I., and Fidelity Distributors Corp., Boston. Both companies are units of Fidelity Investments, Boston.

Fidelity Investments Institutional and Fidelity Distributors settled the action without admitting or denying the charges, but they consented to the entry of the NASD’s findings, NASD said.

As part of the settlement, for the next 5 years, the 2 broker-dealers are required to notify securities holders who want to increase their investments in existing plans that additional shares of the underlying fund can be purchased outside the plans without the securities holders paying the additional creation and sales charges of up to 50% on the first year’s payments.

James Shorris, NASD head of enforcement, found that between January 2003 and January 2006, the 2 Fidelity broker-dealers violated NASD advertising rules by preparing and distributing various pieces of misleading sales literature.

A Fidelity spokeswoman says in response to the enforcement action that Fidelity regrets the errors and is taking steps to ensure that errors of this type do not occur in the future.”

The broker-dealers involved are wholly owned units of Fidelity, but the brokers who sold the plans are separate broker-dealers who are not affiliated with Fidelity, the spokeswoman says.

Shorris explained in a statement, “The Fidelity broker-dealers broke NASD rules by using performance charts and data that presented a misleading picture of the systematic investment plans performance.

“These failures were aggravated by the fact that the plans were sold primarily to military personnel, who often have limited time to study the marketing materials for investment products,” Shorris said.

“And these particular products involve complex or unique features that may not be fully understood by the customers to whom they are offered or by the brokers who recommend them,” Shorris said.


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