3 Brokers Face Sanctions on Fund DiscountsNov 15, 2003 | BLOOMBERG NEWS
The American Express Company, the Wachovia Corporation and Legg Mason Inc. said yesterday that they faced federal sanctions for not passing volume discounts to some large mutual fund clients.
American Express, the fourth-largest United States credit card issuer, also said the Securities and Exchange Commission and NASD had asked for mutual fund data in an investigation of late trading and market-timing activities.
William H. Donaldson, the chairman of the S.E.C., said last week that a "significant number'' of brokerage firms were facing action for failing to give customer discounts, known as breakpoints, on mutual funds. The agency's staff recommended taking action against the firms, which were sent letters advising them of potential charges, he said.
The investigations stem from a failure by brokers to pass on to clients discounts offered by mutual fund managers as incentives to clients purchasing large amounts.
Wachovia, based in Charlotte, N.C., said in an S.E.C. filing that it failed to give large buyers of its mutual funds as much as $5 million in discounts and promised to refund the money with interest. Wachovia, the fifth-biggest United States bank, said it might face regulators' "administrative penalties.''
Legg Mason, a money management and brokerage firm based in Baltimore, said it faced a proposed fine of $2.3 million over allegations it overcharged some mutual fund customers. The company also said it had been subpoenaed by the New York attorney general, Eliot Spitzer.
"It has the potential to be serious,'' said Thane Bublitz, who helps manage about $60 billion, including 2.7 million American Express shares, at Thrivent Financial for Lutherans in Appleton, Wis. "The best thing that a firm can do is be very proactive find where the problem is and fix it.''
The disclosures of probable enforcement action by the S.E.C. and NASD come amid a widening investigation of trading abuses in the $7 trillion mutual fund industry. United States financial stocks fell, with the American Stock Exchange securities broker/dealer index recording its biggest decline in six months. The Charles Schwab Corporation led the 4.1 percent slide after saying it found evidence of possible illegal trading in some of the funds it sells.