State says investment retailer stacked the deck for proprietary mutual funds. American Express Financial Advisors (AEFA) has agreed to pay nearly $7.4 million in fines, investor-restitution payments and costs to settle a New Hampshire Bureau of Securities Regulation enforcement action against it for allegedly pushing its own underperforming mutual funds on private investors without informing them of non-proprietary alternatives.

“We hope this sends a strong signal to brokers and financial advisors operating in New Hampshire,” Mark Connolly, chief securities regulator for the state, says in a media bulletin. “The bureau is committed to preserving a level playing field for all investors, large and small, and companies must adhere to the law and strive to treat clients in a fair and open manner.”

AEFA will pay the state of New Hampshire a $5-million fine, make restitution payments of up to $2 million to New Hampshire investors, and fork over $375,000 to cover the cost of the state’s year-long investigation.

The New Hampshire securities bureau had been looking for $17.5 million in penalties and restitution from AEFA, a subsidiary of Minneapolis-based American Express Company.

The state regulator alleges that AEFA “failed to disclose to New Hampshire clients the conflicts of interest that permeated the company's investment advisor relationship.” More specifically the regulator says that “AEFA financial advisors operated in a system in which they were pressured and rewarded for selling American Express and American Express partnered mutual funds.” In addition, the bureau alleges that “AEFA agents in New Hampshire used model portfolios developed by an employee that contained only American Express mutual funds which in many cases underperformed other available products.

The bureau says it first cottoned on to the alleged malfeasance in routine audits of AEFA’s New Hampshire branches. “While conducting these examinations, staff attorney and lead counsel for the investigation, Jonas Cutler, spotted a consistent pattern of accounts heavily laden with AEFA mutual funds, and uncovered e-mails pressuring agents to sell AEFA funds.” That led to scrutiny of AEFA’s advisory plans sold in New Hampshire from January 1999 through March 2003.

AEFA is glad to put a period to the whole thing. “We are pleased to put the matter behind us,” says firm spokeswoman Marie Davis. “And we are confident that the enhancements we have made to our compliance policies and procedures are aligned with the best interests of our clients.”

Last month AEFA agreed to pay New Jersey $5 million to settle an enforcement action for allegedly overcharging customers in that state.

AEFA supports a network of about 12,000 brokers and registered investment advisors on in-house and independent platforms, including the broker-dealer, RIA and insurance-brokerage platforms of Omaha-based Securities America.

As of 1 August 2005 AEFA will be known as Ameriprise Financial. American Express plans to complete AEFA’s spin-off to shareholders later this summer.  –FWR

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