WASHINGTON Regulators delivered yet another blow to a battered industry on Tuesday as the Securities and Exchange Commission said it has found abusive mutual fund share sales practices at 13 of 15 broker/dealer firms it recently examined in regards to "revenue sharing" arrangements.
An SEC spokesman said that eight of the broker/dealer firms and 12 of the mutual fund firms that have participated in the arrangements are under active investigation. The agency does not release the names of firms that are under investigation if an enforcement action is not shortly forthcoming, the spokesman said.
But Lori Richards, director of the SECs office of compliance, inspections, and examinations, told a group of reporters that the SEC found 14 of 15 broker/dealers examined received cash from funds' investment advisers in such arrangements, sister publication The Bond Buyer reports. Additionally, 10 of the 15 accepted revenue-sharing payments in the form of brokerage commissions.
The bakers dozen apparently provided increased access and visibility in the broker/dealers sales network, as well as favored the sale of funds with which they had a revenue-sharing agreement. Among the perks the fund companies would enjoy were listings on the broker/dealer firms Web sites, access to sales staff, inclusion on a firms recommended list, as well as promotional materials being sent to customers.
As a result of the payments, the broker-dealers would receive between $50 and $400 annually for every $100,000 in new sales of fund shares, and up to $250 annually for every $100,000 of the fund shares that remained invested through them, according to The Bond Buyer.
Typically, there was no or little disclosure about such arrangements to investors, SEC officials said, even though they can lead broker/dealers to sell higher-cost or lower- performing funds to investors and hurt shareholders by reducing fund assets.
Additionally, about half of the B/Ds examined financially rewarded their registered reps for selling a fund from a revenue-sharing partner over another fund. Nearly half of the B/Ds disclosed the revenue-sharing agreements, but the quality of the information varied greatly. The enforcement staff of the SEC is currently examining its findings and determining whether the involved firms adequately informed investors of the conflicts of interest.
In November, Morgan Stanley settled with the SEC for $50 million for failing to disclose to investors compensation it received for selling certain funds.
Donaldson Warns on Heartland
In a separate press conference yesterday, SEC Chairman William H. Donaldson warned independent mutual fund directors to be vigilant in monitoring pricing of portfolio securities, as well as fund fees and performance. He publicly cited Heartland Advisors Inc. for the first time as an example of the SEC's willingness to take enforcement action when such vigilance is lacking.