UNITED STATES OF AMERICA
In the Matter of
H. D. VEST INVESTMENT
| ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTIONS 15(b)(4) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934.|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b)(4) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against H. D. Vest Investment Securities, Inc. ("Vest" or "Respondent").
In anticipation of the institution of these proceedings, Vest has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, Vest consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b)(4) and 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
On the basis of this Order and Vest's Offer, the Commission finds1 that:
1. Vest is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act, with its principal offices in Irving, Texas. Vest has a network of over 6,000 registered representatives located throughout the country. Vest derives the majority of its revenue from the sale of mutual fund products.
2. This matter involves violations of the federal securities laws by Vest in connection with its offer and sale of Class A and Class B shares issued by mutual funds. Between 2001 and 2002, Vest sold Class A shares without providing certain customers with the reductions in front-end loads, or sales charges, also known as "breakpoint" discounts, described in the prospectuses of the funds. According to data Vest submitted to NASD, Vest is estimated to have failed to give certain customers breakpoint discounts totaling approximately $725,216 during the above period. By failing to disclose to certain customers that they were not receiving the benefit of applicable breakpoint discounts, Vest violated Section 17(a)(2) of the Securities Act. Further, because Vest did not charge these customers the correct sales loads as set forth in the mutual funds' prospectuses, and also did not disclose in confirmations the remuneration Vest received from the sales loads charged to these customers, Vest violated Rule 10b-10 under the Exchange Act.
3. Between January 2001 and at least October 2003, Vest also sold Class B mutual fund shares in amounts of $100,000 or greater, without adequately disclosing to certain customers the potential economic advantages of purchasing Class A mutual fund shares. Specifically, during this period, Vest executed approximately 580 transactions in which approximately 482 customers purchased Class B shares in amounts of $100,000 or greater. In recommending that these customers purchase Class B shares, Vest did not adequately disclose the differences in mutual fund share classes, including information about commissions and annual expenses and, importantly, that an equivalent investment in Class A shares could yield a higher return as a result of applicable breakpoint discounts and reduced ongoing expenses. Vest received approximately $691,812 in excess fees and commissions based on the Class B sales to these customers. By failing to disclose the economic advantages of purchasing Class A shares to these customers, Vest violated Section 17(a)(2) of the Securities Act.
4. Mutual fund costs borne by investors generally fall into two categories: sales charges collected directly from shareholders for specific transactions (such as a purchase, redemption, or exchange) and fees and operating expenses imposed continuously on the fund assets.2 A "front-end load" is an industry term for a sales charge that certain fund principal underwriters or distributors charge at the time an investor buys shares. When an investor buys shares with a front-end load, the front-end load portion of the offering price is not invested in the fund, but instead is paid to the fund's principal underwriter or distributor. When the purchase is made through a broker-dealer, the fund's principal underwriter or distributor pays a part of the front-end load amount to the broker-dealer that sold the fund shares to the investor. Typically, front-end loads for shares of equity funds start at 4% to 5.75%.
5. A fund may offer different classes of shares. Typically, shares denominated as "Class A" charge a front-end load. Other classes (e.g., Class B, Class C, etc.) have differing sales charge and expense characteristics. "No-load" funds do not have any front-end or deferred sales charges.
6. Mutual funds that sell shares charging front-end loads usually offer discounts at certain pre-determined levels of investment, which are called "breakpoints." Front-end loads and breakpoints can vary among funds within a fund complex or across fund complexes. For example, a mutual fund might charge an investor 5.75% of the sales price for purchases of less than $50,000, but reduce the sales charge to 4.75% for investments between $50,000 and $99,999. An investor can usually procure discounts on sales charges at investment levels of $50,000, $100,000, $250,000, and $500,000. At the $1 million investment level, generally there is no sales charge.
7. The specific terms and conditions under which breakpoint discounts may become available are determined by the mutual funds, and can vary. Generally, an investor can procure a breakpoint discount through either a single purchase large enough to reach a breakpoint or multiple purchases in a single mutual fund or any of the funds in a fund complex the aggregate value of which is large enough to reach a breakpoint. In reaching a breakpoint, an investor is typically permitted to aggregate transactions made by certain family members and transactions in certain other related accounts, e.g., retirement accounts. An investor may aggregate purchases over time to meet applicable breakpoint thresholds through a "right of accumulation" ("ROA") or "letter of intent" ("LOI"). An investor may be eligible for a discount through an ROA by aggregating the amount of his or her current purchase with the amount of certain prior purchases. An LOI is a written statement of intent by the investor to purchase a certain amount of mutual fund shares over what is usually a thirteen-month period.
8. Mutual funds are required to disclose the schedule of available breakpoints in their prospectuses and disclose how an investor may qualify for breakpoints either in the prospectuses or in their statements of additional information, both of which are filed with the Commission on Form N-1A. Mutual funds generally incorporate by reference into their prospectuses the information included in their statements of additional information.
9. Broker-dealers who sell fund shares to retail customers must disclose breakpoint discount information to their customers and must have procedures reasonably designed to ascertain information necessary to determine the availability and appropriate level of breakpoints. A failure to do so can result not only in the customer being deprived of a benefit to which he or she is entitled, but also in the broker-dealer and representative receiving increased commissions at the customer's expense. See In the Matter of Application of Harold R. Fenocchio for Review of Disciplinary Action Taken by NASD, 46 SEC 279 (1976) (registered representatives "had a responsibility to make certain that a letter of intent was filed with the mutual fund or, at the very least, to inform the clients of their rights of accumulation"). Because of the large number of mutual funds offering different discounts and employing different criteria for determining breakpoint eligibility, many broker-dealers have experienced operational challenges and other difficulties in assuring that customers consistently receive the applicable discounts. Nevertheless, each broker-dealer is responsible for exercising due care, based on information reasonably ascertainable by the broker-dealer, to provide the appropriate breakpoint discounts.
10. Unlike Class A Shares, Class B Shares do not impose a front-end load. Rather, Class B shares generally carry "contingent deferred sales charges," which means that a gradually declining "load" is charged to shareholders if shares are redeemed within a certain number of years, generally five to nine, after purchase. As in A shares, mutual fund companies pay brokers a concession at the point of sale for Class B shares, usually four percent of the amount invested. To recover the cost of the concession, Class B shares carry a higher, continuous, asset-based Rule 12b-1 fee than is charged for an equivalent purchase of A shares. As breakpoints are reached in the sales of Class A shares, the broker's concession is reduced; whereas, in the sale of Class B shares, the concession percentage paid to the broker remains constant.
SEC Advises Vest in 1998 of Violations Regarding Sales of Class A and Class B
Mutual Fund Shares
11. In June 1998 the Commission staff conducted a periodic examination of Vest's operations. A random review of 72 client accounts over a 24-month period revealed at least five customer accounts in which Class A mutual fund shares were sold in dollar amounts that qualified for breakpoint discounts which were not properly awarded to the customer. The same review also found seven customer accounts that contained purchases of Class B shares in amounts that were not economically beneficial to the customers because of breakpoint discounts that would have been available for equivalent purchases of Class A shares. Despite being advised by the Commission staff to take "immediate corrective action" regarding the violations uncovered during the staff's exam, Vest, as discussed below, failed to implement adequate procedures to ensure that breakpoint discounts were being properly awarded on purchases of Class A shares and that its sales of Class B shares were in the best interest of its clients.
Vest's Sales of Class A Shares
Broker-Dealers Perform Self-Assessments
12. From November 2002 through January 2003, the Commission, NASD, and the New York Stock Exchange reviewed thousands of mutual fund transactions at forty-three broker-dealers that sold mutual fund shares with front-end loads. Examiners found widespread failures to deliver breakpoint discounts to eligible customers among the transactions reviewed.
13. As a result of the examination findings, in March 2003 NASD directed broker-dealers that processed 100 or more automated purchases of Class A mutual fund shares with front-end loads in either 2001 or 2002 to conduct a "self-assessment" of their record of delivering breakpoint discounts to customers, based on the customers' accounts and related accounts held at the broker-dealer. The self-assessment was designed to produce a statistically significant sample that would allow NASD to assess the scope of overcharges at individual member firms and to gauge the scope of the problem across the industry as a whole.
14. The self-assessments showed that most firms did not consistently deliver applicable breakpoint discounts to eligible mutual fund share purchasers. Overall, discounts were not delivered in about one out of five eligible transactions.3 The statistical analysis directed by NASD determined that broker-dealers, in the aggregate, failed to deliver at least $86 million in breakpoint discounts to eligible customers in 2001 and 2002.
Vest's Self-Assessment Results of Class A Sales
15. Based on the self-assessment data submitted by Vest, the statistical analysis directed by NASD determined to a 90% level of confidence that (1) Vest failed to give its customers appropriate breakpoint discounts in 33.39% of eligible mutual fund transactions in 2001-2002, and (2) this resulted in missed breakpoints that would have reduced customers' charges by at least $725,216 on their purchases of mutual fund shares with front-end loads during the relevant period.
Vest's Sales of Class B Shares
16. During the period of January 2001 through October 2003, Vest registered representatives ("RRs") recommended to at least 482 of their brokerage customers that they purchase Class B mutual fund shares in 580 separate transactions involving purchases of $100,000 or greater. In recommending that these clients purchase Class B shares, the RRs failed to disclose to the customers that an equivalent purchase of Class A shares in the same mutual fund could yield a higher return as a result of the availability of breakpoint discounts and reduced ongoing costs. Vest received approximately $691,812 in excess fees and commissions based on these 580 Class B transactions.
17. In recommending the purchase of Class B shares in amounts of $100,000 or greater to these customers, the disclosures made by the Vest RRs regarding the various classes of mutual fund shares and associated characteristics differed. Although certain RRs generally discussed with their customers the various share classes and features, they did not disclose the specific impact of a particular breakpoint discount on the recommended purchase. Other RRs did not discuss other classes of mutual funds in recommending the purchase of Class B shares. Further, it does not appear that Vest RRs performed an economic comparison of Class A versus Class B shares before recommending that these customers purchase Class B shares in amounts of $100,000 or greater.
18. Moreover, Vest's mutual fund sales training in 2000 and 2001 failed to adequately explain the economic impact of breakpoint discounts and ongoing expenses associated with purchases of Class B shares of $100,000 or greater. For example, Vest training documents during this period contained the following statements:
· [t]he difference [between mutual fund classes] has nothing to do with risk or return on the investment. ... [t]he only difference is the way the commission or sales charge is paid by the client and collected by you as the financial advisor.
· With a time horizon of over seven years, it doesn't matter if your client buys A or B shares.
· To even the playing field between A and B shares, the B shares convert to A shares after the back-end charges disappear. From that point forward, the B shares have the same lower annual expenses of A shares. As a result of this conversion, the choice of A or B shares becomes one of how clients want to pay for professional advice, not one of receiving the best value for the investment.
In fact, given the current breakpoint discount structure in most mutual fund families and lower ongoing costs associated with Class A mutual fund shares, there may be a substantial difference in the total return between Class A shares and Class B shares in amounts of $100,000 or greater.
19. Furthermore, although Vest provided a Mutual Fund Share Disclosure Acknowledgment ("MFSDA") form to its customers who purchased Class B shares in amounts of $250,000, or higher, the form did not adequately disclose the impact of breakpoint discounts and ongoing expenses on the recommended purchases of Class B shares. Nor did the form describe how to compare the economic differences between an equivalent purchase of Class A and B shares. The MFSDA form, without additional disclosures, failed to comply with the guidelines specifically enumerated by NASD relating to sales of Class B shares.4
20. In addition, Vest's Mutual Fund policies and procedures were not sufficient to detect and prevent the improper sales of Class B shares in amounts of $100,000 or greater. Although Vest had a policy that prohibited the sale of Class B shares to a customer when it was not economically beneficial to the customer, the policy did not define what constituted "economically beneficial."5 In addition, Vest did not provide it's RRs or its supervisory and compliance personnel with guidelines on how to compare the overall return on investment between an equivalent purchase of Class A and B shares.
21. Moreover, Vest did not have sufficient procedures to ensure adequate review of large Class B share transactions. Supervisors were only required to review accounts which contained purchases of Class B shares in amounts of $250,000 or greater, not accounts with Class B trades between $100,000 and $249,999. Further, for trades over $250,000, the supervisor was only required to ensure that a MFSDA form signed from the customer was on file. If not, the supervisor was required to instruct the customer's RR to obtain a signed form from the customer. Vest procedures further provided that the supervisor may, but was not required, to contact the customer to discuss the transaction. From a review of Vest's compliance materials, it does not appear that Vest supervisory personnel contacted customers to discuss their Class B share purchases over $250,000.
Section 17(a)(2) of the Securities Act
22. Section 17(a)(2) of the Securities Act prohibits material misstatements and omissions in any offer or sale of securities. Negligent conduct can violate Section 17(a)(2). E.g., SEC v. Hughes Capital Corp., 124 F.3d 449, 453 (3d Cir. 1997). Vest violated Section 17(a)(2) of the Securities Act by failing to disclose to certain purchasers of front-end load mutual fund shares during 2001 and 2002 that the prices they paid for their investments did not reflect the breakpoint discounts on sales loads to which they were entitled under the terms described in the prospectuses and statements of additional information of the relevant mutual funds. See In the Matter of Robert J. Check, 49 SEC 1004 (1988) (finding violations of Section 17(a)(2) based, in part, on "generalized statistical data" showing widespread failure to provide breakpoint discounts).
23. Vest also violated Section 17(a)(2) by recommending the purchase of Class B shares in amounts of $100,000 or greater to certain customers without disclosing the potential economic benefits of purchasing an equivalent amount of Class A shares. See e.g., DeKwiatkowski v. Bear Stearns & Co., 306 F. 3d 1293, 1302 (2d Cir. 2002) (a broker to non-discretionary accounts "is obliged to give honest and complete information when recommending a purchase or sale").
Rule 10b-10 Under the Exchange Act
24. Rule 10b-10 provides, in relevant part, that it is unlawful for a broker-dealer to effect any transaction for the customer's account unless the broker-dealer, at or before completion of the transaction, provides the customer with written notification disclosing "[t]he amount of any remuneration received or to be received by the broker from such customer in connection with the transaction..." 17 C.F.R. 240.10b-10(a)(2)(i)(B). The confirmations Vest sent to customers for purchases of mutual fund shares during 2001 and 2002 did not disclose the remuneration Vest received from front-end sales loads. Further, in those situations in which Vest failed to apply the applicable breakpoint discount, disclosures in fund prospectuses concerning sales loads and the availability of breakpoint discounts were not, by themselves, sufficient to fully inform customers what they were paying for their shares.6 As a result, Vest violated Rule 10b-10 under the Exchange Act.
25. As a result of the conduct described above, Vest willfully violated Section 17(a)(2) of the Securities Act, and Rule 10b-10 under the Exchange Act.7
Class A Share Undertakings
26. In anticipation of the institution of these proceedings and a related disciplinary action by NASD relating to its sales of Class A shares, Vest agrees to pay a penalty of $725,216, one-half of which will be paid pursuant to the Order, and one-half of which will be paid pursuant to NASD's related order.
27. Pursuant to Vest's Letter of Acceptance, Waiver and Consent ("AWC") submitted to NASD to resolve the related disciplinary action, Vest has agreed to undertake certain remedial and corrective measures related to providing refunds to customers who did not receive appropriate breakpoint discounts. These measures include: (a) providing written notification to each customer who purchased front-end load mutual fund shares through Vest, for the period specified by the AWC, that the firm experienced a problem delivering breakpoint discounts, and that, as a result, the customer may be entitled to a refund; (b) performing a trade-by-trade analysis of all front-end load mutual fund purchases of $2,500 or more, for the period specified by the AWC, which review would encompass all other purchases during that same time period, regardless of dollar amount, by such customers; (c) undertaking vigorous efforts to locate each customer so identified as entitled to a refund and promptly making refunds to all customers who did not receive all applicable breakpoints; and (d) providing a report on Vest's refund program to NASD.
Class B Share Undertakings
Vest also undertakes the following:
28. Within 45 days of the date of entry of the Order, Vest shall prepare a "Mutual Fund Disclosure" in plain English, not unacceptable to the Commission's staff, that will include the disclosures concerning the differences in fees and expenses connected with the purchase of different mutual fund share classes; why Class A shares are more appropriate for some investors; and the firm's policy of not accepting purchases in Class B shares in amounts of $100,000 or greater. Within 90 days of the date of the entry of the Order, Vest shall place the Mutual Fund Disclosure on its website; and send the Mutual Fund Disclosure to all current retail brokerage customers, all Vest customers who purchased Class B shares in amounts of $100,000 or greater who are covered by the "Plan" as discussed in paragraph 30, below, to all new retail customers upon the opening of an account and to all retail brokerage customers on an annual basis thereafter.
29. Vest shall retain, within 45 days of the date of entry of the Order, the services of an Independent Consultant not unacceptable to the Commission's staff. Vest shall exclusively bear all costs, including compensation and expenses, associated with the retention of the Independent Consultant. Vest shall retain the Independent Consultant to conduct a comprehensive review of the policies and procedures relating to RRs' recommendations to customers of Class B shares in amounts of $100,000 or greater, and to recommend policies and procedures that address any deficiencies.
30. Vest shall within 45 days of the date of entry of the Order, provide to the Independent Consultant a list of customers who made single purchases of Class B shares in amounts of $100,000 or greater, between January 1, 2001 and the date of entry of the Order, including details of the date of the purchase, the specific fund purchased, the amount invested and information identifying the customers. The customers who invested in Class B shares in amounts of $100,000 or greater shall include both retail brokerage customers of Vest and Vest customers who purchased directly from the mutual fund company. Additionally, within 45 days of the date of entry of the Order, Vest shall submit to the Independent Consultant for review a plan pursuant to which Vest shall offer the purchasers of $100,000 or greater in a single transaction of Class B shares between January 1, 2001 and the date of entry of the Order, who still hold all such shares, the option of electing for a certain period of time to convert such Class B shares into Class A shares in such a manner that each investor is placed in the same financial position that such investor would have been in with respect to that single transaction had the investor purchased Class A shares instead of Class B shares in that transaction (the "Plan"). The Plan shall also address methods to put such customers who sold some or all of their Class B shares during the above-referenced time period into the same financial position that such investor would have been in with respect to that single transaction had the investor purchased Class A shares instead of Class B shares in that transaction. Vest shall also prepare letters to be sent to each category of such customers, those who still hold all such Class B shares and those who sold some or all of such Class B shares, either offering them the opportunity to convert or other actions in accordance with the Plan (the "Letters"). All contingent deferred sales charges associated with the Plan resulting from the conversion from Class B shares to A shares by Vest customers, shall be paid by Vest and not by the customers. Vest shall also submit the Letters to the Independent Consultant for review within 45 days of the date of entry of the Order. The Plan and the Letters shall not be unacceptable to the Independent Consultant. If the Independent Consultant finds that the Plan does not result in fairly providing an option to the purchasers described above so as to place them in the same financial position such investors would have been in with respect to that single transaction had the investors purchased Class A shares instead of Class B shares in that transaction, Vest shall attempt in good faith to reach an agreement with the Independent Consultant on terms to achieve this objective within 70 days of the date of the entry of the Order. In the event that Vest and the Independent Consultant are unable to agree on an alternative proposal, Vest shall abide by the recommendation of the Independent Consultant.
31. Vest shall cooperate fully with the Independent Consultant and shall provide the Independent Consultant with access to Vest's files, books, records and personnel as reasonably requested.
32. Vest shall further retain the Independent Consultant to submit a written Report thereon to Vest and to the Commission's staff within 145 days after the date of entry of the Order. The Report shall address, at a minimum: (i) the adequacy of the disclosures respecting the differences in mutual fund share classes; (ii) the adequacy of the policies and procedures respecting the RRs recommendations to customers of Class B shares in amounts of $100,000 and greater; and (iii) the adequacy of the Plan, with a goal toward placing the affected customers in the positions they would have been in with respect to a single transaction, to purchase Class A shares with full disclosure. The Report must include a description of the review performed, the conclusions reached, and the Independent Consultant's recommendations for policies and procedures to address any deficiencies identified, an effective system for implementing the recommended policies and procedures and an effective system for establishing and maintaining written records that evidence compliance with the recommended policies and procedures.
33. Within 105 days after the date of entry of the Order, Vest shall in writing advise the Independent Consultant and the Commission's staff of the recommendations from the Report that it has determined to accept and the recommendations that it considers to be unnecessary or inappropriate. With respect to any recommendation that Vest considers unnecessary or inappropriate, Vest shall explain why the objective or purpose of such recommendation is unnecessary or inappropriate and provide in writing an alternative policy, procedure or system designed to achieve the same objective or purpose.
34. With respect to any recommendation with which Vest and the Independent Consultant do not agree, Vest shall attempt in good faith to reach an agreement with the Independent Consultant within 120 days of the date of entry of the Order. In the event the Independent Consultant and Vest are unable to agree on an alternative proposal not unacceptable to the Commission's staff, Vest shall abide by the recommendation of the Independent Consultant.
35. Within 130 days of the date of entry of the Order, Vest shall in writing advise the Independent Consultant and the Commission's staff of the recommendations and proposals that it is adopting.
36. For good cause shown, and upon receipt of a timely application from the Independent Consultant or Vest, the Commission's staff may extend any of the procedural dates set forth above.
37. To ensure the independence of the Independent Consultant, Vest: (i) shall not have the authority to terminate the Independent Consultant, without the prior written approval of the Commission's staff; (ii) shall compensate the Independent Consultant, and persons engaged to assist the Independent Consultant, for services rendered pursuant to the Order at their reasonable and customary rates; (iii) shall not be in and shall not have an attorney-client relationship with the Independent Consultant and shall not seek to invoke the attorney-client or any other doctrine or privilege to prevent the Independent Consultant from transmitting any information, reports, or documents to the Commission or the Commission's staff.
38. To further ensure the independence of the Independent Consultant, Vest shall require the Independent Consultant to enter into an agreement that provides for the period of the engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Vest, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. The agreement will also provide that the Independent Consultant will require that any firm with which the Independent Consultant is affiliated, or of which the Independent Consultant is a member, and any person engaged to assist the Independent Consultant in performance of his or her duties under the Order shall not, without prior written consent of the Commission's staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Vest, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement.
In determining whether to accept Vest's Offer, the Commission has considered the related NASD action, including the penalty that Vest has agreed to pay to resolve that action, and the remedial actions that Vest will undertake for the benefit of affected investors pursuant to NASD action.
In view of the foregoing, the Commission deems it appropriate, and in the public interest to impose the sanctions specified in Vest's Offer.
Accordingly, it is hereby ORDERED that:
A. Pursuant to Section 15(b)(4) of the Exchange Act, Vest is censured;
B. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Vest shall cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) of the Securities Act and Rule 10b-10 under the Exchange Act;
C. Within 10 days of the entry of this Order, Vest shall pay a civil money penalty in the amount of $1,054,420 to the United States Treasury, of which $362,608 is attributable to Vest's Class A share violations and $691,812 of which is attributable to its Class B share violations. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies H. D. Vest Investment Securities, Inc. as a Vest in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Harold Degenhardt, Fort Worth District Office, Securities and Exchange Commission, Burnett Plaza, Suite 1900, 801 Cherry Street, Unit #18, Fort Worth, Texas, 76102-6882;
D. Vest shall pay disgorgement and prejudgment interest, which obligation shall be satisfied by compliance with the customer refund program summarized in paragraph 27 above, and more fully set forth in NASD's related order;
E. Vest shall comply with the terms of the undertakings set forth in paragraphs 28 through 38 above; and
F. Not later than 6 months after the date of the Order, unless otherwise extended by the staff of the Commission for good cause shown, Vest's chief executive officer shall certify in writing to the staff of the Commission that Vest has: 1) implemented procedures, and a system for applying such procedures, that can reasonably be expected to prevent and detect failures by Vest to provide appropriate breakpoint discounts for which customers are eligible on purchases of front-end load mutual funds, based on information reasonably ascertainable by Vest; and 2) taken all necessary and appropriate steps to adopt and implement all recommendations and proposals of the Independent Consultant.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 Annual operating expenses are not charged directly to investors but are deducted from fund assets. These expenses include the management fee, an ongoing charge paid to an investment adviser who manages the fund's assets and selects its portfolio of securities. Some funds charge a Rule 12b-1 fee, named for the rule under the Investment Company Act of 1940 that authorizes mutual funds to pay for distribution expenses, including sales charges used to compensate sales professionals for selling fund shares, directly from a fund's assets. In addition, a fund may also pay a service fee to compensate sales professionals, or other service providers, for ongoing services to investors or their accounts. In addition, all mutual funds incur brokerage and other transaction-related costs that are borne indirectly by the investors in the funds.
3 For purposes of the self-assessment, "eligible transactions" were automated purchases of Class A shares of at least $2,500 in which a sales charge of 1% or more was charged to the customer and a breakpoint discount was applicable. Transactions executed at net asset value were excluded from the self-assessment.
4 NASD Reminds Members of Mutual Fund Sales Practice Obligations, Notice to Members 94-16 (Mar. 1994) (members must "affirmatively advise their customers of the impact of particular breakpoints on the contemplated transactions"). NASD Notice to Members 95-80 (Sept. 1995) (reminding members that, in determining whether a fund is suitable for an investor, a member should consider the fund's expense ratio and sales charges as well as its investment objectives). Suitability Issues for Multi-Class Mutual Funds, NASD Regulatory and Compliance Alert (Summer 2000) ("[M]embers generally should not recommend Class B or C shares to investors who seek to purchase in large amounts and who would incur significantly lower sales charges for Class A share purchases due to the availability of breakpoints, rights of accumulation, or letters of intent.").
5 In May 2003, Vest amended this policy to prohibit the sale of any B shares in the amount of $250,000 or greater. However, this policy was not sufficient to prevent the sales of Class B shares between the amounts of $100,000 and $249,000, which, compared to an equivalent purchase of Class A shares, may also result in an a lower return on investment regardless of market conditions or holding periods. Vest has since adopted a policy prohibiting the sale of Class B shares of $100,000 or greater unless certain exceptions apply.
6 When it adopted Rule 10b-10 in 1977, the Commission stated that if information regarding the "source and amount" of the remuneration is contained in a prospectus delivered to a customer, then broker-dealers do not have to repeat the information in a confirmation. Of course, if a broker-dealer received remuneration which was not disclosed in the prospectus, that remuneration would be required to be separately disclosed on a confirmation. See Securities Exchange Act Release No. 13508 (May 5, 1977). The funds' prospectuses disclosed that the customers were entitled to certain breakpoint discounts, which they did not receive. The confirmations did not correct this prospectus representation and were therefore misleading.
7 "Willfully" as used in this Order means intentionally committing the act which constitutes the violation, see Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). There is no requirement that the actor also be aware that he is violating one of the Rules or Acts.
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