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A $5 million fine imposed against American Fund Distributors (AFD) for directed brokerage in 2006 stands, according to a ruling issued by the National Adjudicatory Council–the appeals body of the Financial Industry Regulatory Authority (FINRA). The NAC upheld a FINRA Hearing Panel decision finding that AFD violated FINRA’s Anti-Reciprocal Rule when it directed more than $98 million in brokerage commissions between 2001 and 2003 to the 46 retail securities firms that were the top sellers of its mutual funds. AFD is the principal underwriter and distributor of American Funds, the popular family of 29 mutual funds. In ruling on AFD’s appeal of the Hearing Panel decision, the NAC concluded that AFD arranged for the direction of a specific amount or percentage of brokerage commissions to other securities firms conditioned upon those firms’ sales of American Funds shares, an “outright” violation of FINRA’s Anti-Reciprocal Rule. The NAC also found that AFD’s conduct was intentional, not negligent, as the Hearing Panel had concluded. The NAC decision is the final decision of FINRA. The Securities and Exchange Commission (SEC) may review and modify FINRA’s findings and sanctions. The parties have 30 days from receipt of the decision to file an appeal with the SEC…

FINRA recently issued an Investor Alert warning investors about the risks of speculating on natural disasters with event-linked securities, such as catastrophe, or “cat” bonds. “Cat bonds offer high yields but can quickly lose most or all of their value if a triggering event, such as a hurricane, earthquake, or pandemic, occurs in specified geographical regions,” FINRA said. The new Investor Alert, “Catastrophe Bonds and Other Event-Linked Securities,” describes how event-linked securities work and helps investors determine whether and to what extent the funds they hold invest in these securities. The Alert explains that prices, yields, and ratings of cat bonds rely almost exclusively on complex computer modeling techniques that determine the probabilities and the potential financial damage of natural disasters. If a catastrophic or “triggering” event occurs, holders could lose most or all of their principal, the Alert cautions. FINRA recommends that investors and their advisors review their funds’ prospectuses to see whether any fund is authorized to invest in event-linked securities–including collateralized debt obligations and derivatives…

FINRA launched two online resources to help companies and their older workers protect themselves from early retirement scams. The written materials for companies–Help Your Employees Achieve Their Retirement Dream: Tips for Spotting Early Retirement Scams–offers tips on how to evaluate the financial professionals involved in early retirement seminars and seminar materials such as invitations, slides, handouts, and scripts. FINRA also suggested company representatives send it early retirement seminar materials for review if they have concerns. FINRA staff will review all seminar materials referred and inform the company whether the materials are consistent with applicable standards. A second article–Early Retirement Seminars 101: Smart Tips for Spotting Retirement Scams–alerts employees to the pitfalls of early retirement schemes. The articles are a two-pronged investor education initiative in the wake of two major FINRA enforcement actions that involved millions of dollars in fines and tens of millions in restitution to employees. The articles are available at

The SEC filed a settled enforcement action against Banc of America Investment Services, Inc. (BAISI) for failing to disclose to clients that in selecting investments for discretionary mutual fund wrap fee accounts, it favored two mutual funds affiliated with BAISI. In the Order, the Commission ruled that BAISI purchased at least two proprietary “Nations Funds” for clients with discretionary wrap fee accounts using a methodology that was contrary to BAISI’s disclosures to those clients. The SEC also charged Columbia Management Advisors, LLC–as successor to Banc of America Capital Management, LLC–with aiding and abetting BAISI’s violations, and ruled that BAISI violated provisions of both the Securities Act and the Advisers Act. Under the terms of the settlement, BAISI and Columbia agreed to censures, cease-and-desist orders, and a total of $9.7 million in disgorgement, prejudgment interest, and penalties, which will be put into a Fair Fund to benefit affected clients of BAISI. The Order also requires BAISI to conduct a review of the firm’s method for recommending and selecting mutual funds in discretionary programs, and the adequacy of its disclosures in this area.


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