SEC Alleges Violations of Mutual Fund Sales Practice Requirements, Sanctions Prudential Securities, Incorporated
FOR IMMEDIATE RELEASE
Washington, D.C., July 10, 2003 -- The Securities and Exchange Commission today announced two enforcement actions - one settled and one unsettled - involving sales of mutual fund shares by Prudential Securities, Inc. (Prudential).
In the settled action, the Commission found that from 1998 to 2000 Prudential, a registered broker-dealer, had inadequate systems in place to effectively monitor and enforce its policies and procedures relating to sales of different classes of mutual funds. In resolving the matter, Prudential agreed, without admitting or denying the Commission's findings, to pay disgorgement and prejudgment interest totaling $82,000, which will be returned to investors harmed by the conduct described in the actions, and a civil penalty in the amount of $300,000. The respondents in the unsettled action are two former employees of Prudential.
In multi-class mutual funds, the primary differences among the classes of shares are the type and amount of fees charged to investors. In today's actions, the SEC's Division of Enforcement alleges that a former Prudential registered representative sold Class "B" shares to his customers, while failing to disclose that if they purchased Class "A" shares, they were eligible for breakpoint discounts based on the size of their mutual fund purchases. The Division further alleges that the respondents stood to make more money through sales of Class B shares than they would from sales of Class A shares. Mutual fund breakpoints are sales charge discounts available to customers who purchase large amounts of certain classes of shares in mutual funds that charge commissions.
"Mutual fund offerings have diversified with the industry's dramatic growth," said Stephen M. Cutler, Director of the SEC's Division of Enforcement, "Unfortunately, in some circumstances, abusive sales practices have accompanied the increasing sales of the various classes of mutual fund shares. Brokerage firms have a duty to ensure that the information they give their customers about different classes of mutual fund shares is complete and accurate, and that their recommendations are made for the benefit of customers, not themselves."
In the unsettled action, the Commission issued an administrative order instituting proceedings against Robert Ostrowski, a former Prudential registered representative, and Rees T. Harris, a former Prudential branch office manager.
The Division alleges that on at least 42 occasions, Ostrowski, a registered representative in Prudential's Wilkes-Barre, Pa. branch office and a top seller of Prudential mutual funds, violated the antifraud provisions of the federal securities laws in connection with sales of mutual funds to his customers. Specifically, the Division alleges that on each of these occasions, Ostrowski sold his customers more than $100,000 of Class B shares in certain Prudential proprietary mutual funds without disclosing the existence of multiple classes of shares within the same fund, the fact that he had decided to purchase Class B shares for their accounts, and the existence of breakpoint discounts available with the purchase of Class A shares of the same funds. These discounts would have made large purchases of the funds' Class A shares less expensive investments for these customers than the same level of investment in Class B shares, which do not offer breakpoints. The Division alleges that Ostrowski received approximately $51,500 in excess commissions from his improper sales and that Prudential received approximately $63,000 in excess commissions.
"Prudential's settlement of the Commission's charges is a positive and constructive response to a serious supervisory failure," said Arthur S. Gabinet, District Administrator of the SEC's Philadelphia District Office. "The Division of Enforcement has alleged that Mr. Ostrowski was one of Prudential's top mutual fund salesmen, but his customers suffered because he maximized his own returns rather than providing accurate and appropriate information to his customers."
The Division also alleges that Harris failed reasonably to supervise Ostrowski by failing to monitor his compliance with Prudential's policies and procedures regarding the sale of mutual fund shares. Harris approved all 42 of Ostrowski's sales of Class B shares in amounts exceeding $100,000 despite policies and procedures that specifically required Harris to ensure that registered representatives under his supervision discussed with customers, among other things, the availability of multiple classes of mutual fund shares and the various sales charges prior to a sale.
A hearing will be scheduled before an administrative law judge in the action against Ostrowski and Harris to determine whether the allegations contained in the order are true, to provide Ostrowski and Harris an opportunity to respond to them, and to determine whether any remedial action should be ordered, or penalties imposed, by the Commission.
In the settled action, the Commission's order found that, although Prudential had policies and procedures prohibiting the type of sales practices that Ostrowski utilized, it did not have any systems in place to effectively monitor and enforce those policies and procedures above the branch office manager's level. As a result, when Harris failed in his supervisory responsibilities, Prudential had inadequate means to detect Harris' failure. The Commission found that, as a result, Prudential failed reasonably to supervise Ostrowski with a view to preventing his violations.
In July 2001, following completion of an internal review, Prudential revised and enhanced its mutual fund policies and procedures, including those related to the sales of Class B mutual fund shares, and implemented systems to monitor compliance with them.
In addition to paying $82,000 in disgorgement and prejudgment interest and a $300,000 civil penalty, the Commission ordered that Prudential be censured and that it comply with its undertakings to, among other things, maintain the revised policies, procedures and systems that it has implemented.
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For further information contact:
Merri Jo Gillette, Associate District AdministratorSee Also: Administrative Proceeding Release No. 33-8247; Administrative Proceeding Release No. 34-48149
David S. Horowitz, Assistant District Administrator
Philadelphia District Office