Bank's brokerage unit poor supervision of fee accounts in 2001 through 2004. The NASD has fined Wachovia Securities $2 million for failing to supervise its fee-based brokerage business adequately. Wachovia has been directed 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," according to a NASD press release.

The violations occurred between 2001 and 2004.

"Firms must have systems and procedures which are tailored to reasonably supervise their business activities," says James Shorris, the NASD's 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."

Several things

That failure, says Shorris, was exacerbated by Wachovia Securities'inability to prevent certain customers from being charged an account fee as well as a sales charge for the same mutual fund investment.

Wachovia Securities launched its Pilot Plus fee-based brokerage program in 1999. In the period under question, Wachovia grew its customer base from 18,000 to over 41,000, with fee payments rising from $55 million to over $110 million.

Among other things, the NASD says Wachovia Securities failed maintain written procedures that would review and monitor Pilot Plus accounts. As a result, about 600 of its customers who conducted no trades in those accounts for at least two consecutive years paid Wachovia collected around $1.9 million in fees. Another 620 customers paid the minimum annual fee of $1,000 for holding assets of less than $25,000, which was twice the stated top rate.

The NASD also says that Wachovia Securities 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." More than 110 customers were charged a sales load as well as Pilot Plus fees for their purchase of Class A shares of mutual funds.

Wachovia Securities also came under fire by the NASD for inadequately supervising its high-revenue-producing brokers, who gained exemption from the firm's review and approval processes. These brokers proceeded to open accounts for customers who had less than the minimum asset balance of $50,000. Two of these brokers, recruited from other firms, brought 340 customers with them and inappropriately recommended Pilot Plus accounts to them.

Wachovia Securities is the primary brokerage business of Charlotte, N.C.-based Wachovia.

The NASD, formerly the National Association of Securities Dealers, is a private-sector of the U.S. securities industry. -FWR

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