Compliance July 11, 2007

Securities America Fined for Improper Commission Sharing

NASD announced on Wednesday it has fined Securities America, Inc. of Omaha, Nebraska, $375,000 for improperly sharing directed brokerage commissions from a mutual fund company with Michael Bullock, a former Securities America broker.
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NASD also found that Securities America failed to adequately supervise Bullock’s communications with his union-sponsored retirement plan clients to ensure that Bullock disclosed his additional compensation to those clients, according to the announcement. NASD has charged Bullock with improperly receiving directed brokerage commissions and other compensation of more than $280,000 and with misrepresenting and failing to disclose this compensation to his retirement plan clients.

NASD said Bullock failed to disclose his additional compensation at the same time he was advising his clients to maintain or include the fund company’s mutual funds in the retirement plans they offered.

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Previous NASD actions involved firms receiving directed brokerage in exchange for promoting specific mutual funds to the investing public and among their own brokers. This is the first case in which the fund company directed brokerage specifically for the benefit of an individual broker, NASD said.

NASD found in its settlement with Securities America, and alleged in its complaint against Bullock, that Bullock negotiated an arrangement with a mutual fund company to have thousands of dollars of brokerage commissions directed to him every month and used the additional compensation to hire a sales assistant, formerly employed by the fund company, to help him find new retirement plan clients. Securities America approved the arrangement and from 2002 through 2003 received $420,000 in directed commissions from the fund company for Bullock’s benefit, paying Bullock $262,500 and retaining $157,500.

NASD alleged that while Bullock was sharing in commissions generated by the fund company, all but one of Bullock’s 15 union retirement plan clients included at least one mutual fund from the fund company in their plans. In addition, in one instance, NASD said Securities America approved one of Bullock’s misleading communications to a client, despite its involvement in the directed commission arrangement that resulted in Bullock’s conflict of interest.

In addition to receiving over $260,000 in directed brokerage payments, Bullock also requested and received a $20,807.32 check directly from the fund company in 2002 to reimburse him for some of the same expenses for which he was receiving directed commissions. The complaint alleges that Bullock concealed from Securities America that he received these funds.

Securities America neither admitted to nor denied the charges against it.

Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD’s BrokerCheck at http://www.nasdbrokercheck.com.

The Markets July 11, 2007

Wealthy Investors Include Investments of Passion in Portfolios

As high net worth individuals (HNWIs) develop an increasingly more global outlook with diversified interests, ‘investments of passion’ have become an important portfolio allocation.
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Investments of passion include luxury collectibles (automobiles, boats, aircraft), jewelry, art, sports-related investments (professional teams, sailing, race horses) and other collectibles categories (wines, antiques, coins, etc.), according to 2007 World Wealth Report, issued recently by Merrill Lynch and Capgemini. Luxury collectibles ranked first, accounting for more than 26% of all HNWIs investments of passion in 2006.

The Report says the art market rated second in the category of investments of passion, garnering 20% of HNWIs allocations. Many wealthy investors, including those without a particular passion for art collecting, now see paintings, drawings, and sculpture as viable vehicles for diversifying their portfolios given the low correlation between art prices and the market cyclicality of stocks, bonds and real estate, a press release noted.

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Jewelry accounted for 16% of HNWIs allocations, and showed greater geographic variations than other investments of passion. In 2006, jewelry was most popular with Middle Easterners, who directed 32% of their investments of passion into this category, while Europeans, Latin Americans and North Americans each allocated less than 20% to jewelry.

This interest from HNWIs in investments of passion resulted in a greater increase in the price of luxury goods than for the price of everyday consumer products, according to the report. The cost of the luxury items tracked by the Forbes’ Cost of Living Extremely Well Index (CLEWI) rose 7.0% while the cost of consumer goods and services, monitored by the Consumer Price Index (CPI), rose 4.0%.

The report warns that as the number of HNWIs interested in investments of passion primarily for purposes of financial gain increases, so does the possibility that these items will become overvalued.

Bertrand Lavayssiere, Group Director, Capgemini Financial Services, said in the release: “Now, in addition to overall portfolio returns, socially responsible investing, global diversification, and an increased focus on philanthropy, investments of passion have become yet another objective that HNWIs incorporate when assessing their overall goals.”

A copy of the 2007 World Wealth Report is available online at www.us.capgemini.com/worldwealthreport or www.ml.com.

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