American Express unit to pay record $7.4m settlement
The financial advisory division of American Express Co. has agreed to pay a record-setting settlement to resolve allegations by the state Bureau of Securities Regulation that it steered clients into the company’s under-performing mutual funds instead of their more attractive competitors.
American Express Financial Advisors will pay a total of $7.4 million to settle the case – by far the largest securities enforcement agreement in the state’s history, eclipsing the $5 million Bureau of Securities Regulation settlement reached in 2002 with Tyco International to resolve charges that the company’s board failed to fully perform its fiduciary duties in the Tyco scandal.
Under the settlement, American Express will pay $5 million in fines and penalties, $2 million in restitution to harmed New Hampshire investors and $375,000 in costs related to the investigation. The state had originally sought $17.5 million in fines and restitution.
The company also must allow an independent consultant to review its sale of proprietary mutual funds and its use of model portfolios. The consultant also will look at the company’s training procedures and decide the amount of restitution to be paid to New Hampshire investors.
“We hope this sends a strong signal to brokers and financial advisers operating in New Hampshire that the bureau is committed to preserving a level playing field for all investors, large and small, and that companies must adhere to the law and strive to treat clients in a fair and open manner,” Mark Connolly, securities bureau director, said.
According to the bureau, agents of the Minneapolis-based American Express routinely used model portfolios that only contained under-performing American Express mutual funds. The company also didn’t adequately disclose the conflict to customers.
Connolly said that investment advisers have a fiduciary obligation to design the best financial plans for their customers instead of selling proprietary funds.
The bureau also alleged that, in e-mails, the company pressured agents to sell American Express funds.
“New Hampshire investors were paying American Express financial advisers to evaluate their unique financial needs and design the best possible portfolios accordingly,” said Jeff Spill, deputy director in charge of enforcement. “What we found instead was a pervasive effort within the company to sell cookie-cutter plans heavily laden with American Express mutual funds, without disclosing to clients how this behavior financially benefited the company and its agents.”
David Kanihan, a spokesman for American Express, said the company neither admitted nor denied the allegations. He noted that the New Hampshire investigation covered a period that ran from 1999 to 2003, and in the past two years the company had instituted “enhancements” to its disclosures and “strengthened compliance policies and procedures.”
American Express earlier this year announced that it plans to spin off the advisory unit, which employs more than 12,000 planners who sell financial advice, funds and insurance to roughly 2.5 million customers.
New Hampshire securities regulators also have a suit pending against Morgan Stanley, charging that in 2002 the firm encouraged its brokers to sell proprietary mutual funds by using sales contests, a violation of National Association of Securities Dealers rules.
One of the alleged violations involved “steak-a-thons,” in which brokers were rewarded with raw meat for selling Morgan funds. State investigators found at least 35 instances of steak rewards for sales of proprietary funds. In the contests, brokers who sold $10,000 of firm funds would receive one steak, $30,000 reaped a rep two steaks and more than $100,000, three. The state says the brokers were also given instructions not to communicate about the contests in writing, thus keeping customers unaware of their existence.