The National Association of Securities Delears has fined an affiliate of insurance giant, AIG, US $1.1 million for directed brokerage violations.

The regulator announced that it has fined American General Securities Inc. more than US$1.1 million in connection with its receipt of directed brokerage in return for providing preferential treatment to certain mutual fund companies and for other violations. In settling the case, AGSI neither admitted nor denied the allegations, but consented to the entry of the NASD’s findings.

NASD rules prohibit a firm from recommending funds or establishing preferred lists of funds in exchange for receipt of directed brokerage. In this case, the NASD found that from January 2002 through September 2003, AGSI operated a shelf space (or revenue sharing) program in which participating mutual fund companies paid a fee in return for preferential treatment by AGSI. That treatment included enhanced access to AGSI’s sales force, including being identified as a “Preferred Product Sponsor” on its internal website, being featured in internal marketing publications distributed to its sales force, and participating in “top producer” or training meetings.

The NASD said that the benefits provided by the shelf space program were offered to only 12 mutual fund complexes during the period. These fund companies paid extra fees for the preferential treatment they received, it added. Three of the 12 fund complexes paid their fees for participating in the shelf space program by directing approximately US$2.7 million in mutual fund portfolio brokerage commissions to AGSI. This 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. The remaining nine fund complexes paid their fees in cash for participation in the program.

The NASD has brought 30 previous actions for similar violations, including actions against six firms that are wholly owned subsidiaries of AIG Advisor Group, Inc, also an AIG-owned company.

“NASD remains committed to ensuring that firms comply with our rules in connection with the marketing and sale of mutual fund shares,” said NASD executive vice president and head of enforcement James Shorris. “The Anti-Reciprocal Rule is designed to ensure that firms recommend mutual funds on their merits and not because of the receipt of brokerage commissions, which are assets of the mutual fund shareholders and should not be used for marketing purposes.”