The National Association of Securities Dealers announced today it has fined Merrill Lynch, Pierce, Fenner & Smith, Wells Fargo Investments and Linsco/Private Ledger Corp. a total of US$19.4 million for suitability and supervisory violations primarily relating to mutual fund sales.

Merrill Lynch was fined US$14 million, while Wells Fargo was fined US$3 million and Linsco was fined US$2.4 million. The amount of the fines approximate the additional commissions the firms received by selling Class B shares rather than Class A mutual fund shares. In addition, each firm is implementing a remediation plan to compensate affected customers – collectively involving more than 29,000 households and nearly 140,000 transactions.

The NASD’s investigation examined transactions during an 18-month period between January 2002 and July 2003. It found that, during this period, the three firms recommended and sold Class B and/or Class C share mutual funds to their customers without considering or adequately disclosing on a consistent basis that an equal investment in Class A shares would generally have been more advantageous to those customers.

Class A shares typically charge a front-end sales charge and also may be subject to an asset-based sales charge, but it generally is lower than the asset-based sales charge imposed by Class B or Class C shares.

“In recommending mutual funds with different share classes, brokers must understand, consider and disclose information about which particular share class would be most beneficial for the customer from an expense perspective,” said Barry Goldsmith, NASD executive vice president and head of enforcement. “The failure by these firms to do this resulted in their customers purchasing Class B and C shares when they would have been better served with Class A shares. The firms have agreed to a remediation plan that will give affected customers the opportunity to convert their holdings to a more financially advantageous mutual fund share class.”

These cases are part of a continuing investigation into mutual funds sales practices Earlier this year, the NASD settled similar charges against Citigroup Global Markets, American Express Financial Advisors (now known as Ameriprise), and Chase Investment Services.