The NASD fined four broker-dealers affiliated with ING-America Insurance Holdings a total of $7 million. According to the NASD’s allegations, the broker-dealers, which together constitute the ING Advisors Network, had mutual fund firms direct portfolio trades to them in exchange for the preferential sales treatment of certain mutual fund companies.

The four broker-dealers, which are from locations across the country, neither admitted nor denied guilt, but agreed to pay the fines. Financial Network Investment Corporation of El Segundo, CA, will pay over $3.4 million. ING Financial Partners of Des Moines, IA, will pay nearly $1.3 million. Multi-Financial Securities Corporation of Denver, CO, will pay over $1.2 million. And Prime Vest Financial Services of St. Cloud, MN, will pay over $1 million.

The NASD’s Anti-Reciprocal Rule prohibits arrangements in which brokerage commissions are used to compensate firms for selling mutual fund shares. The rule is also designed to ensure that a fund firm’s allocation of portfolio transactions is guided by the principle of "best execution" and not by other considerations.

"The use of directed brokerage commissions from a mutual fund as an incentive towards the marketing or preferred treatment of those funds is an impermissible use of customer assets," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "NASD will continue to pursue mutual fund sales practices that put the interests of firms ahead of the interests of customers."

The NASD found that from 2001 through 2003 the four broker-dealers provided a host of marketing benefits to 10 mutual fund complexes that participated in the “Strategic Partners Program,” a shelf-space or revenue-sharing program.

Those benefits included setting yearly sales goals for the funds of the partnered firms, special placement on the ING firms' intranet websites, direct links to the websites of the participating fund companies, increased exposure to the registered representatives of the ING firms, participation in annual national meetings, waiver of ticket charges for registered representatives on sales of participants' funds, and other marketing opportunities.

In return, the mutual funds paid the ING broker-dealers millions of dollars in commissions. Eight of the 10 participating mutual fund complexes paid a portion of their fees by directing approximately $25.7 million in mutual fund portfolio brokerage commissions to the four broker-dealers, despite the fact that none of the firms played any role in the execution of the trades that generated the commissions. The remaining two fund companies paid their revenue-sharing fees in cash.

To date, the NASD has brought more than 30 enforcement actions for similar violations.

In February of last year the NASD charged American Funds Distributors with directing brokerage commissions to approximately 50 brokerage firms as compensation for past sales of American Funds. The firm is challenging the charges. American Funds is the third largest mutual fund family in the U.S., with more than $450 billion in assets and around 25 million shareholder accounts.

SEC rules also prohibit funds from paying for the distribution of their shares with brokerage commissions. Last year Putnam Investment Management, LLC, agreed to pay $40 million to settle charges related to Putnam’s “shelf space” arrangements with broker dealers. According to the Commission’s findings, Putnam entered into preferred marketing arrangements with over 80 broker dealers in which the broker-dealers provided services designed to promote the sale of the Putnam Funds in exchange for directed brokerage commissions.

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