1) Wachovia to pay $37M in merger suit
WASHINGTON - Wachovia Corp. agreed to pay a $37 million civil
fine Thursday to settle federal regulators' allegations that the banking giant violated disclosure rules in connection
with its 2001 merger with First Union Corp.
The Securities
and Exchange Commission alleged in a lawsuit that Wachovia and First Union failed to disclose in quarterly financial reports
and in a joint proxy statement related to the merger that Wachovia intended to, and did in fact, buy $500 million of First
Union stock during the period when First Union and SunTrust Banks had launched competing, all-stock bids for Wachovia. As
a result, Wachovia shareholders were unable to evaluate the effect of the company's purchases of First Union shares before
voting on the competing bids, the SEC said.
The agency said
that Wachovia provided incomplete documents and was slow to produce them during its investigation, a factor taken into account
in setting the fine at $37 million.
"The substantial penalty
here reflects not only the seriousness of the disclosure violations but also the company's failure to meet its legal obligations
in the course of an SEC investigation," SEC Enforcement Director Stephen Cutler said in a statement.
Wachovia, based in Charlotte, N.C., neither admitted nor denied wrongdoing in the settlement
but did agree to refrain from future violations of the securities laws.
Wachovia merged with First Union in late 2001 in a $14.6 billion deal creating the nation's fourth-largest banking
company with operations from Florida to Connecticut. The merger ended a bitter takeover battle in which SunTrust had challenged
First Union's bid with a $15.1 billion unsolicited offer for Wachovia. The combined bank took the Wachovia name.
Wachovia disclosed in August that the SEC was poised to take action against
the company and several executives in connection with the First Union merger. Wachovia also said that SEC staff was considering
a civil action against a subsidiary, Evergreen Investment Management, for alleged improper trading of mutual funds.
This month, Wachovia completed a $14.3 billion acquisition of SouthTrust Corp.
to create the largest bank in the Southeast and give Wachovia an opening in the lucrative Texas market.
2) NASD Fines Wachovia Securities $2 Million for Fee-Based Account
Violations & NASD Also Orders
Firm to Identify and Pay Restitution to Approximately 1,300 Customers
Washington, D.C. — NASD announced today that it has fined Wachovia Securities LLC of
Richmond, VA, $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.
"Firms must have systems and procedures which are tailored to reasonably supervise their business activities,"
said NASD James Shorris, Executive Vice President and Head of Enforcement. "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."
In fee-based brokerage accounts, customers are charged an annual fee that is either
fixed or a percentage of the assets in the account, rather than a commission for each transaction, as in a traditional brokerage
account. These accounts first became available in 1999 as a result of a proposed Securities and Exchange Commission (SEC)
rule that exempted stockbrokers from certain elements of the Investment Advisers Act of 1940. In March, a federal court struck
down the final version of that SEC rule.
Wachovia began
offering a fee-based brokerage account, now called "Pilot Plus," to its customers in 1999. In 2001, Wachovia had
just over 18,000 Pilot Plus customers who paid more than $55 million in Pilot Plus fees. By the end of 2004, that number had
grown to more than 41,000 customers who paid more than $110 million in Pilot Plus fees.
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 Pilot Plus accounts. While
the firm informed its brokers that a Pilot Plus account was not appropriate for customers who made a limited number of trades,
buy-and-hold customers, and customers with assets below $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 Pilot Plus accounts for at least two consecutive years, paid the firm approximately $1.9 million in fees. Also, 620
Pilot Plus customers held assets of less than $25,000 for at least one full year and paid at least the minimum annual fee
of $1,000. This fee represented twice the firm's stated top rate of 2 percent allowed under the Pilot Plus agreement.
During the time that these customers' eligible assets averaged below $25,000 for at least one full year, they paid a total
of approximately $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 Pilot Plus 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. Ordinarily, when a customer purchases Class A shares of a mutual fund, the customer pays
a front end sales charge or "load" at the time of purchase. Under Wachovia's procedures, customers who purchased
Class A shares outside of a Pilot Plus account and paid a front end sales charge on the purchase were not allowed to transfer
those shares into a Pilot Plus account for at least 13 months so as to avoid duplicative charges for the fund shares. But
Wachovia failed to enforce these procedures. Consequently, Wachovia charged more than 110 customers both a load and Pilot
Plus fees on the purchase of Class A shares of mutual funds. These customers also will receive restitution pursuant to the
settlement.
NASD also found that Wachovia failed
to adequately supervise certain high revenue-producing brokers, who were members of the firm's "Red Carpet Club."
The Red Carpet Club members were exempted from some of the firm's review and approval processes. Whereas most Pilot Plus
accounts were opened only after review and approval by both a branch manager and a representative from the unit responsible
for the oversight of all of the firm's fee-based programs, only branch manager approval was required for customers of
Red Carpet Club members. This less vigorous review resulted in Red Carpet Club members opening Pilot Plus accounts for customers
with total assets which were below the firm's stated $50,000 minimum account balance. This resulted in Red Carpet Club
members' customers constituting approximately 99 percent of those accounts in Pilot Plus that held less than $25,000 in
assets for at least one full year.
3)
FINRA Fines Wachovia Capital Markets $300,000 for Deficient Disclosures in Research Reports
Wachovia Omitted Numerous Required Conflict of Interest Disclosures, Used Inadequate
Disclaimer Language
Washington, D.C. — The Financial
Industry Regulatory Authority (FINRA) announced today that it has censured and fined Wachovia Capital Markets, LLC $300,000
for violations of FINRA's research analyst conflict of interest disclosure rules.
"This case strikes at the heart of FINRA's research disclosure program, which was
put into place in 2002 in part to combat incentives that could lead to biased research," said Susan L. Merrill, FINRA
Executive Vice President and Chief of Enforcement. "These critical reforms require firms to provide investors with information
about actual and potential conflicts of interest that could influence analysts' conclusions about investing in publicly
traded companies. Wachovia failed to ensure that certain of its research reports contained this vital information."
FINRA found that from June 2004 to May 2006, Wachovia failed to include in 40
research reports a total of 56 disclosures concerning Wachovia's financial relationships with subject companies. In 20
of those reports, Wachovia failed to disclose that it managed or co-managed a public offering of securities issued by the
subject company.
In other research reports, Wachovia failed
to disclose that it received compensation from the subject company for investment banking services, that it owned an interest
in the common stock of the company or that it was making a market in the securities of the company.
Additionally, FINRA found that from March 2004 to July 2007, in over 15,000 research
reports, Wachovia included a disclaimer stating that the firm and its affiliates "may" own an interest in the securities
of the subject company. This disclaimer is inconsistent with FINRA's requirement that firms affirmatively disclose whether
they own one percent or more of the common equity stock of the subject company. By using this disclaimer, Wachovia ignored
specific guidance set forth in Notice to Members 04-18, published in March 2004, which expressly instructs firms that the
use of general disclaimers that are inconsistent with required disclosures violates FINRA's rules.
Wachovia also failed to adequately implement supervisory procedures concerning
its research disclosures.
In settling this matter, Wachovia
neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
4) NASD Fines 29 Firms Over $9.2 Million for Late Reporting Failures
Stall Disclosure of Potential Broker Misconduct to Public, Regulators, Brokerages
Washington, DC -- NASD announced today that it has censured and fined 29 securities
firms over $9.2 million for more than 8,000 late disclosures of reportable information about their brokers – including
customer complaints, regulatory actions and criminal charges and convictions.
NASD also prohibited two firms -- Merrill
Lynch and Wachovia – from registering new brokers for five business days, in view of the number of their reporting violations
in this case and their previous regulatory filing histories. NASD imposed a similar prohibition and a $2.2 million fine against
Morgan Stanley in July for late reporting violations.
Under NASD rules, after a securities firm hires a broker, it must ensure that
information on the broker’s application for registration (Form U4) is kept current in NASD’s Central Registration
Depository (CRD). The firm must update that information whenever significant events occur – including regulatory actions
against the broker, customer complaints, settlements involving the broker and criminal charges and convictions. Normally,
those updates must be filed within 30 days. If the reportable event involves a statutory disqualification (usually the result
of a criminal conviction), the event must be disclosed within 10 days. In addition, firms must notify NASD within 30 days
of learning that information disclosed on a termination notice (Form U5) filed for a broker has become inaccurate or incomplete.
Information maintained in CRD on all of the more than 665,000 registered brokers and the nearly 5,300 registered firms is
available not only to regulators and law enforcement officials, but to the public through NASD’s BrokerCheck. Last year,
more than 2.8 million investors investigated brokers’ backgrounds through BrokerCheck.
“Investors, regulators and
others rely heavily on the integrity of the information in the CRD public reporting system – and, in turn, the integrity
of that system depends on accurate and prompt reporting by firms,” said NASD Vice Chairman Mary L. Schapiro. “The
fact that so many firms failed in their obligation to report so much important information in a timely way is deeply troubling.
These firms and others will understand from the severity of the fines and other sanctions in this case that timely reporting
of broker information is a fundamental obligation that cannot be neglected or ignored.”
During the period January 2002 through
March 2004, each of the 29 firms failed to timely report at least 25 percent of the required disclosures in the areas reviewed
by NASD, and some firms failed to timely report over 70 percent. NASD also found that each firm failed to have supervisory
systems and procedures in place reasonably designed to achieve compliance with these reporting requirements.
To resolve these actions,
each firm agreed to conduct internal audits to evaluate the effectiveness of its system for ensuring compliance with these
reporting obligations. In addition, an officer of each firm must certify that such audits have occurred, that recommendations
from the audits have been implemented and that the firm has established systems and procedures reasonably designed to achieve
compliance with NASD reporting requirements.