NASD announced today that it has fined three distributors - Scudder Distributors, Inc. of Chicago, Putnam Retail Management Limited Partnership of Boston and AllianceBernstein Investments, Inc. of New York - a total of $700,000 for violations of NASD's non-cash compensation rules, including improperly providing entertainment and paying for guest expenses at training and education meetings.
NASD imposed a $425,000 fine against Scudder, which distributes the investment products of Scudder Investments; a $175,000 fine against Putnam, which distributes its own investment products; and a $100,000 fine against AllianceBernstein, which distributes the investment products of AllianceBernstein L.P.
NASD limits the use of compensation - including non-cash compensation such as reimbursement for travel expenses, meals and lodging in connection with training and education meetings - to help ensure the integrity of investment recommendations. NASD rules are designed to prevent point-of-sale incentives from compromising a broker's objectivity in matching the investment needs of the customer with the appropriate investment product.
NASD found that the three distributors, which rely on retail brokerage firms and their brokers to recommend and sell the investment products they distribute, improperly provided and paid for entertainment and attendees' spouse and guest expenses in connection with training and education meetings.
"Today's enforcement action underscores the need for distributors of mutual funds and variable annuities to understand the limits surrounding the use of non-cash compensation." said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "Non-cash compensation of the sort found in this case is prohibited because it can induce brokers to put their own interests ahead of their clients' interests."
Scudder
NASD found that between 2001 through 2004, Scudder provided three types of impermissible non-cash compensation in connection with education and training meetings it sponsored. First, NASD found that Scudder permitted spouses to attend educational events and paid for or reimbursed their expenses, including expensive meals at premier restaurants in New York City. Second, the firm paid for impermissible entertainment at educational events, including "theme" parties such as an elaborate rock-and-roll party in 2002 which involved recreating the "Whiskey-A-Go-Go" bar of the 1970's and bringing in make-up artists to make attendees "look the part." Finally, Scudder paid for additional nights of lodging for selected attendees, without adequately ensuring that the cost of these extended stays was justified by cost savings associated with the extended stay. This included paying for Scudder attendees to engage in activities such as golf, fishing, and horseback riding, followed by dinner with live entertainment on a Saturday when there were no scheduled educational or training activities. Scudder also failed to have adequate systems and procedures in place to provide reasonable assurance that it complied with NASD's non-cash compensation rules.
Putnam
NASD found that Putnam violated NASD rules relating to non-cash compensation from 2001 through 2004. During that period, Putnam paid for meals and ground transportation expenses of brokers' spouses and guests in connection with numerous training and education meetings. Putnam also paid for entertainment at training and education meetings for brokers and their guests in connection with two training and education meetings in 2001, including tickets to a Boston Red Sox game in connection with one such meeting. Two of the meetings at which Putnam paid for guest meal expenses occurred in late April 2004, three weeks after Putnam received advice from outside counsel that such payments were contrary to NASD rules. Putnam's compliance materials were updated to reflect this advice, but the firm still paid for guest meal expenses at the two meetings. NASD also found that Putnam failed to have in place systems and procedures reasonably designed to achieve compliance with NASD's non-cash compensation rules.
AllianceBernstein
NASD found that in 2001, AllianceBernstein improperly paid for brokers' guests to attend dinners at prominent New York City restaurants and attend Broadway plays in connection with numerous training and education meetings. AllianceBernstein's improper spending on entertainment occurred at six meetings in 2001, and its improper spending on meals for guests of meeting attendees occurred at 10 other meetings in 2001. NASD also found that the firm failed to have in place systems and procedures reasonably designed to achieve compliance with NASD's non-cash compensation rules.
In settling with NASD, Scudder, Putnam, and AllianceBernstein neither admitted nor denied the allegations, but consented to the entry of NASD's findings.
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. In 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 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 registered firms. For more information, please visit our Web site at www.nasd.com.
("Copyright 2007 National Association of Securities Dealers, Inc.")
