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NASD Looks At Sales Practices of 12 Brokerages

Nov 7, 2003 | USA TODAY

The ongoing probe of mutual fund wrongdoing has expanded to sales practices, and fund firms are stepping up internal reviews.

The National Association of Securities Dealers, the securities industry self-regulatory group, is investigating 12 brokerage firms for agreeing to promote mutual funds in return for trading business.

In testimony before the House Capital Markets subcommittee Thursday, Mary Schapiro, president of the NASD's regulatory division, said such arrangements are a violation of NASD rules.

"We hope to finish one of the cases this year," Schapiro said later in an interview.

Also Thursday, Alliance Capital Management, the 25th-largest fund complex, said an internal review had uncovered evidence of market timing. In late September, Alliance suspended two employees for conflicts of interest related to mutual fund trading.

Alliance acknowledged in a statement Thursday that it received a notice Oct. 31 from the Securities and Exchange Commission informing the firm that the agency intends to recommend enforcement action related to market-timing transactions.

Alliance said it hopes to resolve the issues with the SEC and the New York attorney general's office. The resolution would probably include sanctions, penalties and appropriate restitution to fund shareholders, Alliance said.

Until now, the mutual fund probe largely has focused on late trading and market-timing irregularities.

Illegal late trading occurs when investors place trades after 4 p.m. but get the 4 p.m. price. Market timing involves making rapid-fire trades to take advantage of price moves in international markets. It's potentially fraudulent if it violates mutual fund rules or if it benefits only a select group of investors.

"Market timing and late trading is just the tip of the iceberg," says Gary Gensler, co-author of The Great Mutual Fund Trap. "There are a lot of problems in the mutual fund industry that were open secrets."

This week, the SEC said it also is looking into 12b-1 marketing fees, especially in cases where the funds have been closed to new investors.

And Wednesday, New York Attorney General Eliot Spitzer said he is looking into allegations involving the allocation of hot initial public stock offerings in the mutual fund industry.

Spitzer was a big player in the investigation into the allocation of hot IPOs on Wall Street. A legal settlement earlier this year by 10 Wall Street firms limits the most abusive practice of attracting business by offering clients plum IPOs.

Earlier this year, Massachusetts securities regulators launched an investigation into mutual fund sales practices at Morgan Stanley. The SEC and New York attorney general have joined the probe. In September, the NASD fined the firm $2 million for using sales contests to reward brokers for selling the firm's mutual funds.


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