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NASD Alert: Call Center Abuse

Editor's Note: The following is an investor alert from NASD originally posted on March 16. It is being republished here with their permission as a service to TheStreet.com's readers.

Some securities firms use call centers to provide support for a variety of administrative and customer service issues. Some firms, especially discount brokers, utilize call centers to accommodate self-directed investors. Generally, such call centers respond to incoming calls initiated by the investor. In most cases, the individuals who staff these call centers don't call you, don't recommend specific investments and in many cases don't receive commissions or other transaction-based compensation for selling investment products.

This Investor Alert focuses on a different, and relatively new, type of call center -- the customer advisory center. It is a center that is staffed by securities professionals who may provide financial planning services, sell securities products and receive commissions or other financial incentives for doing so. These new, sales-orientated centers are becoming more prevalent, and you may not be familiar with how they work. Before you deal with this new type of call center, be sure you understand its operations.

Some of these sales-oriented centers are characterized by:

  • A client base that may be determined by account transaction activity, portfolio size or household assets (for example, household assets of $100,000 or less).
  • Accounts that are transferred to the center without prior customer consent. Customers may learn of their transfer through a letter from a customer's broker or brokerage firm stating that the customer's account has been transferred to or "enrolled" in the firm's investment or call center.
  • Customers who no longer have a single broker assigned to their account.
  • A compensation structure that creates incentives for center brokers to sell certain investment products or to bring in new money to existing accounts.
  • Potential Problems

    In a recent Enforcement Action against Merrill Lynch (MER), NASD identified a number of problems and rule violations associated with one of these new customer advisory centers:

  • Aggressive sales tactics that were not only in violation of NASD's rules, but different from the type of relationship the customer had experienced before being moved to the new call center environment.
  • Failure to gather customer suitability information.
  • Mutual fund switches (the transfer of money from one mutual fund owned by the investor to a new fund) that were not suitable for a variety of reasons. For example, switches were made without first considering whether comparable funds that met the customers' investment objectives and performance requirements were available within their existing mutual fund families without paying additional loads.
  • Misrepresentations and omissions of key information. These included failing to disclose the name of the fund being recommended and relevant information such as a fund's investment objectives, portfolio makeup, historical income and yield information, expense ratios and sales charges. Performance differences between funds were misrepresented, and customers were also told that recommended switches would be at "no cost" or words to that effect, without advising them that their new mutual fund shares would require them to pay higher annual fees, and could subject them to CDSCs if sold within a certain period. (A Contingent Deferred Sales Charge, or CDSC, is a fee that is charged when you sell your mutual fund shares. Class B mutual fund shares often impose a CDSC.)
  • Failure to disclose the availability of different classes of mutual fund shares and the different costs and expenses associated with each option.
  • Inadequate supervision of call center representatives.
  • Sales contests designed to promote the sale of a brokerage firm's own mutual funds, in violation of NASD noncash compensation rules.
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