In Focus

August 15, 2005

ecurities regulators recently have been busy, issuing an array of major sanctions against a host of financial services firms. Let's review four significant ones. Hornor, Townsend & Kent, Inc. was fined $325,000 by the NASD for improper sales contests of variable life and annuity policies, and prohibited from selling those products for three years! The contests created improper incentives for the firm's brokers to sell proprietary products, instead of focusing on the quality of the product and the customers' needs.

Edward Jones & Co., LP was fined $1.5 million in an agreement that it reached with Missouri securities regulators over allegations that the firm had failed to disclose to the public its revenue sharing arrangements that it has with mutual fund companies to promote those products over other products. Last year, the firm settled similar charges with the SEC and the US Justice Department. Edward Jones had received $82 million from seven "preferred" fund families. In return, Edward Jones sold those funds to its customers 95% of the time!

Morgan Stanley was in the regulatory news yet again. This time, the NASD ordered the firm to pay $6.1 million for failing to adequately supervise its customers' fee-based accounts. Fee-based accounts, as opposed to commission-based accounts, may be legitimate pricing structures only for accounts that are moderately or highly traded. They are inappropriate for certain "buy and hold" accounts, as well as for accounts with balances less than $50,000. Those concerns fell upon deaf hears, however, at Morgan Stanley! The NASD has ordered Morgan Stanley to pay restitution to such customers.

Not to be outdone, American Express settled with the New Hampshire securities regulators for $7.5 million! American Express likes its financial plans sold to customers for prices ranging from $300 to several thousand dollars. New Hampshire regulators alleged that while AmEx promoted these plans as "designed to assist individuals and/or business owners in identifying, analyzing, and reaching their financial objectives", "[i]n reality, [it] was primarily a vehicle to promote and sell American Express and specifically selected securities products, many with mediocre performance." The regulator also alleged that the New Hampshire AmEx branch manager encouraged such sales because his bonus (four times his salary!) was tied to the sales of such conflicted products. The regulator alleged that AmEx did not adequately disclose its conflicts of interest in promoting such products.

What else is new!

— James J. Eccleston
FinancialCounsel.com