Skip to comments.SEC: Fund Share-Touting Abuses Rampant
Posted on 01/13/2004 8:07:58 PM PST by Beck_isright
SEC: Fund Share-Touting Abuses Rampant
Tue Jan 13, 6:16 PM ET
By Kevin Drawbaugh
WASHINGTON (Reuters) - Brokerage firms regularly take payments from mutual funds to tout their shares ahead of others, U.S. regulators said on Tuesday, revealing a probe that showed 13 brokerages engaged in such "revenue-sharing" deals.
In another blow to Wall Street and the $7-trillion mutual fund business, the regulators said they are investigating whether dozens of brokerages and funds "adequately informed investors of the conflicts of interest" of revenue sharing.
The Securities and Exchange Commission (news - web sites), in a briefing on the findings of a nine-month inquiry, declined to name the 13 firms. Half of them, it said, kept their arrangements secret.
"These revenue sharing practices ... I believe, exist throughout the industry," Lori Richards, director of the SEC's Office of Compliance Inspections and Examinations, told reporters after an SEC press briefing on the probe findings.
As scandals simmered across the $7-trillion fund business, the SEC was scheduled to hold a public meeting on Wednesday to consider a range of mutual fund reforms, including one focused on the revenue-sharing problem.
The proposed rule would require mutual funds to spell out "the compensation and incentives of selling brokers" in confirmation statements received by investors.
"The rule proposal tomorrow is going to give shareholders everything they could hope for and more in the form of dollar disclosure of all of these payments," said Mercer Bullard, a fund investor advocate, former SEC staffer and securities law professor at the University of Mississippi.
Wall Street brokerages handle almost two-thirds of the money that flows in and out of America's roughly 8,000 mutual funds through share purchases and sales by investors.
The Investment Company Institute, the fund industry's lobbying group, has long supported "that incentives be disclosed to shareholders," said ICI spokesman John Collins.
Scandals in the fund industry in recent months have centered chiefly on market timing and late trading abuses, in which favored investors skimmed low-risk profits by doing trades in fund shares unavailable to average investors.
But authorities are moving into other areas, as well, including junk bond fund mispricing, as well as "soft-dollar" and "directed brokerage" deals between brokerages and funds.
The SEC's revenue-sharing probe started in April 2003. To date, the agency SEC said, it has found 14 brokerage firms took cash from mutual fund investment advisers and 10 funds accepted payments in the form of brokerage commissions on fund trades.
"In return for these payments, 13 of the 15 firms appear to have favored the sale of the revenue-sharing funds by providing increased access and visibility in the broker-dealer's sales networks," the SEC said.
On Nov. 17, brokerage Morgan Stanley (NYSE:MWD - news) agreed to pay $50 million to settle charges it failed to tell investors of compensation it got for selling certain fund shares.
Without admitting or denying the charges, Morgan agreed to disclose more about its relationships with mutual fund groups.
About half of the brokerages targeted in the SEC probe paid individual brokers more for selling the shares of selected, revenue-sharing funds or one of the brokerages' own funds than for selling other funds' shares, the SEC said.
Other proposals to come before the SEC on Wednesday would require clearer disclosure of fees charged by funds, more independence among fund directors, and reporting by fund portfolio managers of their personal trades in funds they run.
We'll have none of that "book reading" going on here. You sound like a Demo...ah Hell. I can't say it with a straight face like other people can. :P
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