FINRA Eyes Action Against Firms Selling Municipal Bonds

The Financial Industry Regulatory Authority is preparing to take enforcement action against certain firms for selling municipal bonds to retail customers without disclosing material information, including that the bonds' credit ratings had been spiraling downward.

Speaking on a municipal securities panel at the Securities Industry and Financial Markets Association's Compliance and Legal Seminar, Malcolm Northam, FINRA's director of fixed income, said the agency also will take a series of enforcement actions this year against firms for excessive markups and markdowns of municipal securities.

In other action, FINRA is conducting inquiries of muni bond underwriters' relationships with swap providers and investment advisors tapped to serve state and local municipal bond issuers and investment pools or pension funds, he said.

But, generally, a big area of focus in the municipal market for FINRA during 2010 will be dealer interactions with retail customers, Northam said. "The key words for 2010 are retail, retail, retail," he said. One area that FINRA plans to focus on is retail order periods, which increasingly are being included in sales of new muni bond issues, he said. FINRA plans to look at issuers' requests for retail order periods, how the underwriters are complying with those requests, as well as how issuers and underwriters are defining retail.

If issuers are asking underwriters to set aside a certain amount of bonds for retail customers, "I should darn well be able to see retail trades going on," Northam said.

Roth IRA Conversions Surge

New rules and technology, trends among Baby Boomers and the Great Recession have led to a burst in Roth individual retirement account conversions.

At Bank of America, conversions to Roth IRAs in the first quarter spiked to about 15,000 from 3,600 a year earlier, and handily topped 2009's total of 8,000. Tax law changes involving income thresholds resulted in roughly 13 million U.S. households becoming newly eligible for conversion to Roths from traditional IRAs or 401(k)s.

The recession also played a significant role in the mass conversion. "Many people, unfortunately, experienced a depreciation in assets, both personal and retirement, and with the tax law kicking in, many people decided that it made sense with their assets at a lower threshold to pay for the conversion now," said Chuck Toth, director of product management for personal retirement at Bank of America Merrill Lynch.

The influx of Baby Boomers was also influential. "They are becoming more focused on retirement and what that means for them from a planning perspective," Toth said.

It was the same story at Fidelity Investments, a leading provider of IRAs, which said conversions to Roth IRAs during the first quarter increased dramatically. Fidelity also credited its jump to the assistance of trained financial representatives and the availability of extensive online content and tools.

The number of investors seeking guidance from Fidelity on Roth IRA conversions hit a record in the quarter.

Keep Derivatives: McNabb

As the Securities and Exchange Commission moves quickly to impose new regulations on derivatives in mutual and exchange-traded funds, regulators should realize that derivatives have become an important tool, said F. William McNabb II, president and chief executive officer of Vanguard Group. Portfolio managers and transfer agents rely on derivatives to provide diversification, fund redemptions and value holdings, according to McNabb and State Street Global Advisors Senior Managing Director James Ross.

Just because a fund employs derivatives, it does not necessarily mean the fund is leveraging, McNabb said. And not all derivatives are created equal, Ross added.

T. Rowe Price in Push for Advisers, Overseas Market

T. Rowe Price is fast gaining new market share as banks and other intermediaries move to a fees-and-advice model, and as the mutual fund company makes a concentrated push overseas to rebuild assets under management.

"The growth of advice has been awesome, and you couple that with the Boomer retirement wave," said George Riedel, head of intermediary distribution within T. Rowe's third-party distribution division. "I have to say, it's been a boon."

Assets under management have been on the rise following the market crash. By the end of 2008, assets had fallen to $276 billion from $400 billion a year earlier, despite clients largely leaving their money with the firm. Assets then grew 42% in 2009, to $391.3 billion, and at March 31, they stood at $419 billion.

NY A.G. Cuomo Sues Ivy For Lying About Madoff

New York Attorney General Andrew M. Cuomo filed a lawsuit Tuesday against the hedge fund division of Ivy Asset Management, a Bank of New York Mellon company, and two of its executives, alleging they deliberately mislead clients about investments tied to Bernard L. Madoff.

The suit says that Ivy, its former Chief Executive Officer Lawrence Simon, and its former Chief Investment Officer Howard Wohl, "kept clients in the dark about damaging financial information about Madoff so Ivy could bring in millions in advisory fees."

The lawsuit, filed in New York State Supreme Court in Manhattan, said Ivy was paid more than $40 million between 1998 and 2008 to give advice and conduct due diligence for clients with large Madoff investments. While conducting this due diligence, Ivy allegedly learned Madoff was not investing funds as advertised, and internal e-mails showed Ivy did not disclose this information to clients for fear of losing revenue from fees.

As a result, Ivy's clients lost more than $227 million after Madoff's Ponzi scheme collapsed in December 2008. Among the victims were hundreds of investors as well as dozens of New York union pension and welfare plans. The suit said 76 upstate New York union pension and welfare plans lost more than $150 million.

Ivy knew about problems with Madoff's investment strategy as early as 1997, according to the Cuomo suit, which alleges the New York-based unit of BNY Mellon gave "stronger warnings" about concerns to clients whose relationship with Ivy wasn't as dependent on Madoff.

The suit says Simon and Wohl each obtained more than $100 million from the sale of Ivy to BNY Mellon in 2000.

Ivy is also facing private civil lawsuits from the Madoff case.

Investors Keeping Tabs on Employment, Interest Rates

A majority of online investors polled by web-based brokerage firm TradeKing have a more bullish stance on the stock market for the rest of this year.

Even amid the ongoing stock market gyrations, stagnant employment numbers and interest rate uncertainty, investors are still counting on the U.S. to lend horsepower to a global economic recovery.

According to an e-mail survey of 3,000 clients in late April, 71% believe the Standard & Poor's 500 will rise between 5% and 20% by the end of this year, up from 66% in January.

Among those expecting tax refunds, 26% said they would invest the money in the stock market, up from 20% in April 2008. Just 18% will pay down debt, and 17% plan on saving their refunds.

Some of this came as a surprise to Don Montanaro, TradeKing's chairman and chief executive officer.

"What we see playing out in this topsy-turvy market, is a fairly xenophobic view of the market, a U.S.-centric view," he said. "Certainly, we read headlines that are less negative, but I did not think it would be enough to move the needle that much in a quarter. But it has."

Take unemployment, for instance, which rose to 9.9% last month, according to the Bureau of Labor Statistics. "Personally, I believe you need to see a move down in the unemployment numbers before people have that kind of conviction," Montanaro said.

None of the findings suggest that investors are detached from the realities of the market, however. Actually, 45% of respondents cited unemployment claims and interest rates, in particular, as their top triggers to watch closely over the next three months. Also, investors believe the Federal Reserve will only raise interest rates if the central bank believes the economy can withstand the change without going into a double-dip recession.

Over the next three months, 40% of are taking a "neutral" position before executing trading tactics.

ETF Assets Rise 2.9%

According to monthly data from State Street Global Advisors released Monday, assets held in U.S. exchange-traded funds rose 2.9% from a month earlier to $830 billion, the third monthly gain. Exchange-traded funds outpaced the Standard & Poors 500 Composite Index, which rose 1.5% in April.

Gains were evenly distributed across all 12 ETF categories, with six gaining more than $2 billion in assets. Small-cap ETFs were the biggest winners, climbing $2.7 billion, followed by mid-cap ETFs, which gained $1.7 billion.

(c) Copyright 2010 Money Management Executive and SourceMedia Inc. All rights reserved.

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