By James Langton
(April 19 – 11:30 ET) – NASD Regulation Inc. has censured and fined a brokerage firm and two of its employees for improperly recommending deferred sales charge funds over front-end load funds.
NASDR announced that it has censured and fined Stifel, Nicolaus & Company Inc. of St. Louis, and two of its employees, broker Michael Grimes and his supervisor, William Lasko, for violating NASD rules in connection with the sale of class B mutual fund shares. NASDR found that between June 1996 and May 1998, Grimes made unsuitable sales totalling over US$7 million to 44 customers in class B mutual fund shares, and that Lasko and the firm failed to supervise Grimes.
In this case, the class A shares incurred a front-end sales load, but had lower on-going expenses than class B shares. Customers who purchased class B shares did not pay an upfront sales charge, but were subject to a DSC for six years. The class B shares also incurred higher on-going distribution expenses than the class A shares.
The NASDR found that Grimes engaged in a pattern of making unsuitable recommendations of class B shares to customers. He recommended that each of 15 customers purchase over US$250,000 in class B shares, when it would have been more cost-effective for those customers to purchase of class A shares.
NASDR found that recommendations to purchase over US$250,000 in class B shares exceeded the maximum purchase limitation and were unsuitable in light of the amount sold, the sales and distribution charges incurred and because the customers could have purchased the A shares with substantially lower sales charges. NASDR also found that Stifel and Grimes earned sales commissions of over US$290,000 on the sale of class B shares. The sales commissions would have been less than half this amount had they sold class A shares.
In another instance, NASDR found that Grimes recommended to 29 customers that they liquidate another mutual fund and purchase, in the aggregate, over US$500,000 of class B shares. Again, the customers were eligible to purchase class A shares, and NASDR says the A shares were the more cost-effective purchase at the time because of a temporary marketing promotion offered by the fund that eliminated a sales load at either the time of purchase or the time of sale. Stifel and Grimes earned $21,000 on the sale of these class B shares, and would not have earned any sales commission had they sold class A shares.
As part of a settlement with the NASDR, Stifel has agreed to exchange the class B shares sold to these customers for class A shares at no charge. The maximum possible cost of this restitution offer, should every customer make the exchange, is approximately US$225,000, which will be paid jointly by Stifel and Grimes.
As a result of the NASD disciplinary action, Grimes has been suspended for 30 days and will pay fine of US$30,000. Lasko has been suspended for 10 days in a supervisory capacity, and has been fined, together with the firm, US$25,000. Stifel has agreed to pay a total fine of US$41,000, which included the violations noted above. Both the firm and the two respondents have neither admitted nor denied the allegations, but have consented to the entry of findings pursuant to the settlement.