NASD Fines Firm for Undisclosed YSP Sharing

Hantz Financial Services Inc. has agreed to pay a $675,000 fine for alleged fraud and misrepresentations relating to undisclosed revenue sharing arrangements and other violations, according to an announcement Thursday by NASD. Meanwhile, John Hantz, the firm’s president, CEO, founder and primary owner, has individually agreed to a censure, $25,000 fine and 30-day suspension from acting in a supervisory capacity for failing to supervise the company’s revenue sharing activities.

Regulators found that the Southfield, Mich.-based firm represented itself differently to its product suppliers and to consumers in order to achieve greater revenues, the announcement said. Among Hantz’s misrepresentations was inadequate disclosure of the affiliate relationship it carried with a mortgage brokerage it referred thousands of refinance prospects to.

Hantz entered into revenue sharing arrangements with specific suppliers in each product category, then encouraged its brokers to focus sales almost exclusively upon these suppliers’ products in exchange for millions of dollars in marketing fees or special cash compensation, NASD said. However, such arrangements were not disclosed to customers.

The financial services firm violated NASD rules by suggesting to both consumers and mortgage regulators that its brokers did not receive referral fees for directing mortgage loans to its affiliate Tranex Financial when in fact it paid brokers 25 percent of the net yield spread Tranex earned on each referral loan, according to the announcement.

“Hantz Financial failed to meet its fundamental obligation to put its customers’ interests first, and to disclose material conflicts of interest arising from revenue sharing arrangements,” said Barry Goldsmith, NASD executive vice president and head of enforcement, in a written statement.

The company also misled suppliers by giving the impression it had a proprietary sales force rather than one consisting of independent contractors, the regulators reported.

“This firm portrayed itself as independent, unbiased and armed with a myriad of product alternatives to meet its clients’ needs — when in fact it was captive to a few preferred suppliers,” Goldsmith added.

Hantz and its primary owner neither admitted nor denied the NASD charges, but consented to relief that was non-scienter — the legal term for “unintended” — in order to resolve two years of cooperative discussions on this matter, noted Hantz attorney Bradley Schram in an announcement.

“It has always been the intent of [the financial holding company] and Mr. Hantz to place the best interest of their clients first,” Schram added. “To the best of my knowledge, no clients have ever complained or initiated any legal action based upon these charges.”

NASD said it found that Hantz brokers directed between 81 percent and 99 percent of their sales in each product category to the designated preferred suppliers.

Between 2002 and 2004, Hantz collected more than $4.2 million in marketing fees.

“The revenue sharing was so important to the firm’s profitability that, without it, Hantz Financial’s net profits in 2002 would have fallen from over $1 million to just $57,602,” NASD said. “By 2004, its annual income from marketing fees had doubled and accounted for seven percent of the firm’s overall revenues.”

But Hantz noted the “revenue sharing arrangements amounted to only 7% of the firm’s revenue, and were not paid by the clients.” Despite this, it consented to the regulator’s request to disclose this information to consumers.

The financial holding company, which operates primarily in Michigan and Ohio, reportedly also agreed to satisfy the NASDs disclosure concerns, making specific and immediate disclosures on its Web site about conflicts, updating of policies, procedures, and training to ensure oversight.