The National Association of Securities Dealers has told Piper Jaffray Co. to expect disciplinary action for several of its compensation arrangements with mutual fund companies, the company disclosed.
Piper Jaffray revealed the possible action in a filing with the Securities and Exchange Commission on Wednesday. Company shares fell 22 cents Wednesday to close at $40.13 on the New York Stock Exchange. In midmorning trading Thursday, the stock was up 20 cents at $40.33.
The action relates to so-called "directed brokerage" arrangements, in which a mutual fund sends trading business to a brokerage firm in return for the brokerage selling shares in the fund to investors.
Such arrangements are prohibited by the NASD, the brokerage industry's self-policing organization, because the payments could lead brokers to pitch funds that aren't suitable for all investors.
A company spokeswoman did not immediately return a call seeking comment on Thursday.
The SEC and the NASD are investigating more than a dozen brokerages for possibly failing to disclose such arrangements, although Piper Jaffray was not initially a target of the government probe.
Minneapolis-based Piper Jaffray said it contacted the NASD after an internal review turned up evidence of compensation deals and two directed brokerage pacts with mutual fund companies. The NASD then requested documents and information.
"We have been notified that the NASD staff preliminarily has determined to recommend that disciplinary action be imposed on us based on such arrangements," Piper Jaffray said in the SEC filing.
Piper Jaffray said it will try to resolve the matter through discussions with NASD staff.
Wednesday's disclosure comes less than a month after Piper Jaffray agreed to pay $2.4 million to settle allegations that it allocated shares of hot IPOs to executives in exchange for lucrative investment banking business.
According to the NASD, between 1999 and 2001, a group of 22 executives received shares in IPOs from Piper Jaffray. They sold these shares for large profits and then directed investment banking business to Piper Jaffray.