The National Association of Securities Dealers today announced that it has fined Wachovia Securities LLC US$2 million for failing to adequately supervise its fee-based brokerage business between 2001 through 2004.

In addition, NASD ordered Wachovia to identify and pay restitution to approximately 1,300 customers who were inappropriately allowed to continue maintaining fee-based accounts, or who were inappropriately charged account fees on Class A mutual fund share holdings for which they had already paid a sales load. The firm also is required to retain an outside consultant to review its process of identifying and paying restitution to customers.

The NASD found that during 2001 through 2004, Wachovia failed to establish and maintain an adequate supervisory system, including written procedures, reasonably designed to review and monitor its fee-based accounts. While the firm informed its brokers that a fee-based account was not appropriate for customers who made a limited number of trades, buy-and-hold customers, and customers with assets below US$50,000, Wachovia failed to put in place a system and procedures reasonably designed to determine whether Pilot Plus accounts were appropriate for its customers.

NASD’s investigation revealed that 594 Wachovia customers, who conducted no trades in their accounts for at least two consecutive years, paid the firm approximately US$1.9 million in fees. Also, 620 customers held assets of less than US$25,000 for at least one full year and paid at least the minimum annual fee of US$1,000. This fee represented twice the firm’s stated top rate of 2% allowed under the account agreement. During the time that these customers’ eligible assets averaged below US$25,000 for at least one full year, they paid a total of approximately US$1 million in Pilot Plus fees. All of these customers will be entitled to restitution under the settlement.

In addition, Wachovia failed to reasonably enforce its written procedures designed to protect customers from being assessed both an initial sales charge and an on-going asset-based fee on the purchases of Class A shares of mutual funds. The NASD also found that the firm failed to adequately supervise certain high revenue-producing brokers.

“Firms must have systems and procedures which are tailored to reasonably supervise their business activities,” said James Shorris, executive vice president and head of enforcement at the NASD. “In the case of fee-based accounts, firms had an obligation to their customers to assess the appropriateness of such accounts both when the accounts were opened and periodically thereafter. Here, Wachovia failed to implement a system designed to ensure that an assessment of the appropriateness of the fee-based account occurred. This failure was compounded by the firm’s failure to prevent certain fee-based customers from being charged both an account fee and a sales charge for the same mutual fund investments.”