The National Association of Securities Dealers yesterday fined eight broker-dealers more than US$7.75 million for directed brokerage violations.

All of the cases — including seven retail firms and one mutual fund distributor — involve violations of NASD rules which prohibit firms from favoring the sale of shares of mutual funds on the basis of brokerage commissions received by the firm. Among other things, the rules prohibit a firm from recommending funds or establishing preferred lists of funds in exchange for receipt of directed brokerage.

The NASD found that the seven retail firms operated “preferred partner” or “shelf space” programs that provided benefits to specific mutual fund complexes in return for directed brokerage. The benefits to the mutual fund complexes included, in various cases, higher visibility on firms’ internal websites, including inclusion on internal lists identifying the funds as participants in the programs; increased access to firms’ sales forces; participation in “top producer” or training meetings, and promotion of the preferred funds on a broader basis than was available for other funds.

The mutual fund complexes that participated in these programs paid extra fees for the preferential treatment they received. The additional fees were usually based on a combination of sales and/or assets under management by the brokerage firm. Certain complexes participating in the preferred partner programs paid part or all of the revenue sharing fees by the use of directed brokerage – that is, by directing commissions from trades in the portfolios they managed to the firms.

The retail firms generally monitored the amount of directed brokerage received to ensure that the fund complexes were satisfying their revenue sharing obligations. The use of directed brokerage allowed the fund complexes to use assets of the mutual funds instead of their own money to meet their revenue sharing obligations.

“We continue to pursue conduct which puts the interests of firms ahead of the interests of customers,” said Barry Goldsmith, NASD executive vice president and head of enforcement. “NASD’s prohibition on the receipt of directed brokerage is designed to eliminate these conflicts of interest in the sale of mutual funds, whose costs are paid not by the mutual fund company, but by the funds’ shareholders.”

The firms sanctioned are IFC Holdings Inc. (d/b/a INVEST Financial Corporation); Commonwealth Financial Network; National Planning Corporation Inc.; Mutual Service Corporation; Lincoln Financial Advisors Corporation; SII Investments Inc.; Investment Centers of America Inc.; and Lord Abbett Distributor LLC.

The NASD has brought 20 previous actions for similar violations.