American Express Co. said staff of the National Association of Securities Dealers is leaning toward recommending enforcement action against the financial-services company’s broker-dealer subsidiary because of its revenue-sharing arrangements with mutual funds.
The NASD staff’s preliminary decision to recommend action gives the New York-based company’s financial advisers unit a chance to discuss the allegations with the regulator before it issues a final recommendation.
American Express Financial Advisors “intends to take advantage of this opportunity,” the company said Wednesday in a regulatory filing.
In its notice of possible disciplinary action, the NASD staff argues that aspects of American Express Financial Advisors’ revenue-sharing pacts with mutual funds may have violated federal securities laws, as well as NASD and Securities and Exchange Commission rules and regulations.
Under the arrangements, certain nonproprietary mutual funds paid American Express Financial Advisors to have their shares offered through the company’s national distribution network, according to Wednesday’s filing with the SEC. Many mutual funds and brokerage firms have said they’re under regulatory scrutiny for similar arrangements.
The NASD staff alleges American Express Financial Advisors didn’t adequately disclose the revenue-sharing arrangements during the period from January 2001 until May 2003. The staff notice also cites the company’s failure to mention the agreements in its brokerage confirmations and faults the company for receiving directed brokerage from January 2001 until December 2003.
American Express previously has said that regulators — including the NASD, SEC and various state agencies — had requested information from the company’s broker-dealer unit as part of industrywide investigations of mutual-fund trading and distribution practices.
American Express said in a statement that it continues to cooperate with the NASD and other regulators but a company spokesman wasn’t immediately available to comment.
If the NASD decides to pursue an enforcement action against American Express Financial Advisors, it would be the second time this year the unit has encountered regulatory trouble.
The unit was one of many firms facing an SEC and NASD enforcement action stemming from their failure to provide so-called breakpoint discounts to customers on certain large mutual fund purchases. Breakpoints are discounts that investors are supposed to receive with certain large investments in mutual funds.
In February, the American Express unit settled the action, and agreed to pay a $3.7 million fine and to reimburse customers who didn’t receive the discounts they deserved.