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Insurance industry

AIG Subsidiaries Fined $34 Million by NASD for Mutual Fund Conflicts

Strategic Insights

— 1 min read

Fifteen companies, including six subsidiaries of American International Group Inc., were fined a total of $34 million by the National Association of Securities Dealers for receiving commissions in exchange for promoting certain mutual funds. The NASD, a private-sector regulator, said the deals violated the NASD's Anti-Reciprocal Rule, which prohibits companies from favoring particular mutual funds in exchange for brokerage commissions. The subsidiaries involved operated "preferred partner" programs that gave preferential treatment to a small number of mutual fund complexes in exchange for directed brokerage and extra fees.

Key Takeaways:

  • Six subsidiaries of AIG were among the 15 companies fined a total of $34 million by the NASD, including Royal Alliance Associates Inc., SunAmerica Securities Inc., FSC Securities Corp., Sentra Securities Corp., Spelman & Co., and Advantage Capital Corp.
  • The NASD's Anti-Reciprocal Rule prohibits companies from favoring particular mutual funds in exchange for brokerage commissions, and the fined companies engaged in "preferred partner" programs that gave preferential treatment to a small number of mutual fund complexes.
  • Benefits received by the mutual funds in these programs included higher visibility on the brokers' internal websites, increased access to the companies' sales forces, and promotion of their funds on a broader basis than was available for other funds.
  • NASD Vice President Mary L. Schapiro emphasized that when recommending mutual fund investments, firms must act on the basis of the merits of the funds and the investment objectives of the customers, not because of other benefits the brokerage firm will receive.
  • The six AIG subsidiaries received fines of $6.6 million, $2.5 million, $2.4 million, $780,000, $450,000, respectively, and the remaining nine companies received fines totaling $6.6 million.

Statistics:

  • Total fines: $34 million
  • Fines collected from AIG subsidiaries: $6.6 million, $2.5 million, $2.4 million, $780,000, $450,000
  • Total number of companies fined: 15
  • Total number of AIG subsidiaries fined: 6
  • Percentage of total fines collected from AIG subsidiaries: 58%

Sources:

  • A. M. Best (via COMTEX)
  • National Association of Securities Dealers (NASD)
  • Securities and Exchange Commission (SEC)
  • COMTEX News Service (http://www.comtexnews.com)
  • A. M. Best Company, Inc.

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