Yesterday I wrote on elderly investors. Today I share a case about "disabled investors", though they were not the victims.
In the US, NASD recently fined Citigroup Global Markets US$400,000 in relation to a ploy by more than 100 of its brokers to improperly obtain waivers of mutual fund sales charges by falsely claiming that their customers were disabled. It was also ordered to pay US$715,000 in restitution to the affected mutual fund companies.
The false claims relate to the Contingent Deferred Sales Charge (CDSC) waivers. CDSC is the sales charge imposed by mutual fund companies on investors who redeem their Class B shares within a certain period after purchase. CDSC may be waived under certain circumstances such as death, disability, etc. To claim the disability waiver for a customer, a broker should obtain and/or submit certain documentation evidencing the customer's eligibility. The waiver is generally available only when the customer becomes disabled after the mutual fund purchase.
NASD found that, from 1 June 2001 to 30 June 2002, Citigroup brokers improperly entered disability waivers for hundreds of customers for 2,419 fund transactions amounting to US$47m. In several instances, they even entered CDSC waivers for hedge funds by claiming that they were "disabled individuals"!
One broker entered disabiliy waivers for over 80% of his customer base, where most of those customers were, of course, not disabled. In many cases, they subsequently used the proceeds to make new investments.
NASD also found that Citigroup failed to maintain and enforce reasonable internal procedures and systems to prevent and detect the above abusive practices. In particular, the firm did not ensure compliance with the documentation requirements for the customers' eligibility.
I think this case was considered serious given the long period of violation (13 months), significant numbers (of brokers, customers & transanctions) involved and lack of monitoring.
Now I've realized claiming "disability" may not only cheat the government of money, but also the fund houses! I wonder whether these mutual fund companies had maintained a robust system in handling the waiver claims.
No. Not until the firm has been penalised. You are talking about control systems. You should have realised compliance (or internal control) is a costly exercise and thing to have. Much of the cost in fact goes down the drain. You spend it simply lead the regulators happier. The situation is better in the case of banks as they have enormous financial resources and labour resources and because of their fiduciary duties, they are more willingly to spend the money. In the case of brokers, especially the midium-size, they seem have the necessary resources, yet, which boss will sincerely maintain good control at the expense of the botton line or his income. Therefore, you could seem a lot of strange things, even those beyond your imagination, in those firms. The people there also don't give it a damn. Why not browsing the web, msn after 4 rather than to maintain good controls for you (the firm, the boss and the control personnel.
ReplyDelete