The cases against Citigroup and Chase involve their recommendations and sales of Class B and Class C shares of mutual funds, while the action involving American Express relates only to Class B shares. In all three cases, the firms made recommendations and sales of mutual funds to their customers without considering or adequately disclosing, on a consistent basis, that an equal investment in Class A shares would generally have been more economically advantageous for their customers by providing a higher overall rate of return. The firms also had inadequate supervisory and compliance policies and procedures relating to these mutual fund sales.
In particular, NASD found that the firms did not consistently consider that large investments in Class A shares of mutual funds entitle customers to breakpoint discounts on sales charges, generally beginning at the $50,000 investment level, which are not available for investments in other share classes. Investors may be entitled to breakpoints based on the amount of a single mutual fund purchase; the total amount of multiple purchases in the same family of funds; and/or the total amount of mutual fund investments held, at the time of the new purchase, by members of the customer's "household" - typically, accounts of close family members.
Unlike Class A shares, Class B shares are also subject to contingent deferred sales charges (CDSCs) for a period of time, generally six years. Class B and Class C shares are also subject to higher ongoing fees than Class A shares for as long as they are held. Even though investors do not pay a front-end sales charge for Class B or Class C shares, the potential CDSCs and the higher ongoing fees significantly affect the return on mutual fund investments, particularly at higher dollar levels.
"In recommending mutual funds that offer different share classes, brokers must consider the costs for each class and the effect those costs will have on a customer's investment, and recommend the share class that is most advantageous to the customer," said NASD Vice Chairman Mary L. Schapiro.
Since 2002, NASD has provided an online Mutual Fund Expense Analyzer to assist brokers and investors in comparing how sales charges, fees and other fund expenses can affect returns.
In resolving these actions, the firms have agreed to a remediation plan that includes over 50,000 households and more than 275,000 transactions in Class B shares, and to a lesser extent, Class C shares. The plan generally covers investors who, between January 1, 2002 and March 22, 2005, purchased Class B shares aggregating to $50,000 or more, depending upon the particular fund's pricing structure. A limited number of investors who purchased Class C shares during the same time frame (generally those who purchased $500,000) will also be included in the remediation plan. A number of exclusions also apply.
NASD's settlement with Citigroup includes more than 18,000 households, involving more than 90,000 Class B and Class C share transactions. NASD fined Citigroup $6.25 million, which takes into consideration the $20 million fine and other sanctions the Securities and Exchange Commission (SEC) is imposing on Citigroup to settle a related enforcement action involving sales of Class B shares, among other things.
NASD's settlement with American Express includes more than 30,000 households and 182,000 Class B share transactions. NASD fined American Express $13 million. NASD's settlement with Chase involves more than 2,000 households and 4,000 Class B and C share transactions. NASD fined Chase $2 million. The amount of the fines was based on the estimated additional commissions each firm received in connection with affected Class B share transactions.
Within approximately five months, each firm will notify affected customers that they will have an opportunity to convert certain of their Class B and/or Class C shares to Class A shares so that customers will be restored to the position they would have been in had they originally purchased Class A shares. In addition, those customers who sold some or all of their Class B or Class C shares may be eligible to receive a cash payment relating to the shares that were sold. The plan will take up to nine months to complete, and each firm will provide a response center to handle customer inquiries and to assist affected customers.
NASD is posting a special section on its Web site - Improper Sale of Mutual Fund Class B and C Shares: Remediation Information for Investors - to assist investors covered by the remediation plan.
For information about the differences in mutual fund share classes, see the NASD Investor Alerts Understanding Mutual Fund Classes and Class B Mutual Fund Shares: Do They Make the Grade? For information about breakpoint discounts on Class A share investments, see the NASD Investor Alerts Mutual Fund Breakpoints: A Break Worth Taking and Mutual Fund Breakpoints: Are You Owed A Refund?
Each of the firms settled the actions without admitting or denying the allegations, but consented to the entry of NASD's findings.
NASD acknowledges the substantial assistance and cooperation of the SEC's Philadelphia District Office in this matter.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2004, members of the public used this service to conduct more than 3.8 million searches for existing brokers or firms and requested more than 190,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web site at www.nasd.com.
("Copyright 2005 National Association of Securities Dealers, Inc.")
