A.G. Edwards Settles With SEC on Oversight Charges
A.G. Edwards will pay the Securities and Exchange Commission $3.86 million to settle charges that it failed to supervise brokers who used deceptive means to engage in mutual fund market timing. The fine includes a civil penalty of $1.5 million and $2.36 million in disgorgement and interest.
The firm also agreed to hire an independent consultant to review whether the changes it has made to its policies and procedures should prevent and detect future market-timing activity.
Although the Commission has settled with one former A.G. Edwards broker, Charles Sacco, it has opened proceedings against another one of the firm's brokers and two branch managers, Thomas Bridge, James Edge and Jeffrey Robles.
The SEC said that brokers in several of A.G. Edwards' offices engaged in market timing between January 2001 and September 2003.
Merri Jo Gillette, director of the SEC's Chicago regional office, said: "By failing to develop or adopt reasonable policies to prevent its registered representatives' misconduct, A.G. Edwards ignored its responsibility to reasonably supervise its registered representatives."
Investors Pressuring Hedge Funds to Lower Fees
Typically delivering high double-digit returns, hedge funds have had no trouble charging investors hefty fees, typically, 2-and-20: 2% of assets and 20% of gains. But with performance disappointing of late, some investors are pressuring hedge funds to lower their fees, BusinessWeek reports.
Last year, the average hedge fund returned 12.9%, whereas the S&P 500 rose 15.1%.
Meanwhile, wealthy investors' interest in hedge funds is on the decline; 27% of households worth more than $25 million own hedge funds, down from 38% two years ago, according to Spectrem Group.
"We have no problem paying high performance fees for a manager's selection, but we find taking on average market risk inherently unsatisfying," said Russell Read, chief investment officer of CalPERS.
Robert Discolo, head of hedge fund securities at AIG Global Investment Group, agreed: "In most cases, [managers] don't deliver enough to justify their fees. Most funds are doing things that can be replicated much cheaper."
As a result, institutional investors with large stakes in hedge funds are pressuring the managers to lower fees. At the same time, some hedge funds are voluntarily rewarding investors who agree to lock up their money for three years, rather than the standard one year, with a 1.5-and-15 rate, that is, 1.5% of assets and 15% of gains.
Independent Directors Issue 12b-1 Fee Guidance
The Mutual Fund Directors Forum, a group of independent directors, issued guidelines on what boards of directors should consider when reviewing 12b-1 fees. The group agreed with the Securities and Exchange Commission, which recently vowed to review the fees, that the industry has changed considerably since the time when the fees were first instituted.
Specifically, the forum calls on directors to analyze how their funds are distributed and whether use of fund assets to pay for distribution may benefit shareholders by providing greater stability of fund assets and by attracting more assets. They should look at the total distribution budget and how, if they are used, 12b-1 fees fit into that. In addition, directors should consider extending distribution of their firm's funds through additional distribution channels and analyze whether their firm's distribution costs are competitive with those of other companies.
"All directors are focused on taking all necessary steps to ensure that the best interests of their shareholders are being represented when fund assets are used to pay for distribution of shares," said Susan Ferris Wyderko, executive director of the Forum. "But as we state in our best practices, it is clear that Rule 12b-1, as it is currently structured, simply does not reflect the current marketplace and cries out for serious review and significant reform."
When they were first introduced in the 1980s, 12b-1 fees were meant for marketing to help a fund grow assets. Today, however, they are used as an alternative to front-end loads to compensate brokers or, sometimes, for fund administration and shareholder services.
FBI: Fraudsters Scamming Online Brokerage Accounts
The Federal Bureau of Investigation is warning that tens of millions of dollars have been robbed from online brokerage accounts by scammers who target hotel guests and Internet cafe patrons, Bloomberg reports.
A number of affected brokerages have reimbursed their customers for their losses, although not all brokerages have policies requiring that they do so. E*Trade Financial paid $18 million in last year's third quarter to reimburse customers whose accounts were scammed, while TD Ameritrade paid $4 million.
In March, the Justice Department opened its first criminal charges in such cases. Since December, the Securities and Exchange Commission has brought five civil complaints against such scammers. Several more cases are in the pipeline, according to an SEC official.
The latest fraud combines identify theft with a pump-and-dump scheme. In the first part of the machination, the scammers install keystroke-logging programs on computers in public locations to steal investors' usernames and passwords. They then deplete the investors' accounts and use the money for the second part of their scheme, in which they buy up shares of thinly traded stocks that they already own, boosting the price and then selling out.
Zurich Capital Settles With SEC for $16.8 Million
Zurich Capital has settled with the Securities and Exchange Commission for having provided financing to four of its hedge fund clients for the purpose of market timing mutual funds. The firm is paying a $16.8 million fine, consisting of $12.8 million in disgorgement and a $4 million penalty, all of which will be distributed to the mutual funds that were harmed as a result of the market timing.
"By knowingly financing their hedge fund clients' deceptive market timing, Zurich Capital reaped substantial fees at the expense of long-term mutual fund shareholders," said Mark Schonfeld, director of the SEC's New York regional office. "Because of Zurich Capital's attractive financing arrangement and its willingness to create a number of anonymous special purpose vehicles for its hedge fund clients, the hedge funds were able to inflate their trading profits from their deceptive conduct."
Zurich Capital, which is currently winding down its operations, consented to the order without admitting or denying the charges.
Bonds, Large-Cap Funds Big Business in 1st Quarter
Investors showed continued interest in bond and large-cap funds in the first quarter, while interest in mid-cap and growth funds shrank, according to The Wall Street Journal.
Corporate and high-yield offerings led the bond boom, according to AMG Data Services. High-yield bond funds enjoyed the biggest inflows since 2003. Bonds overall had a record-breaking $44.7 billion in inflows. That is double the 10-year average for the first quarter, according to Citigroup Investment Research.
With the economy cooling as expected, many investors are moving into true-blue-chips. Inflows to large-cap funds were about $16.3 billion last quarter, more than two-and-a-half times the amount during the first quarter of 2006.
Large-cap blend funds led the charge with $6.6 billion of inflows, according to Boston-based Financial Research Corp. In 2006, that category suffered outflows of $2.6 billion.
Flows to mid-caps and small-caps were down about 35%, compared to the same period last year.
April marked the 11th consecutive month of outflows for aggressive growth funds, making the total redemptions nearly $40 billion. Inflows to value funds, on the other hand, were $15.2 billion.
U.S. funds continue to be less popular than overseas stocks. In 2006, domestic fund inflows were about $15.2 billion. In March 2006 domestic funds took in $1.6 billion.
Domestic ETFs have fared better, with 53% of all flows coursing to domestic funds.
Nurses Saving Overtime Dollars for Retirement
A nursing shortage in the U.S. is causing many nurses to double up on shifts and make more money, and in return they are saving more for retirement than other working employees, research from Fidelity Investments found.
Twenty-two percent of nurses said they are allocating their extra income earned from additional shifts to their retirement savings.
The study also found that 90% of nurses reported participating in their employer-sponsored workplace plan, and despite the long hours, 44% are taking the time to actively manage their plan's investments on an annual basis or more.
Nurses are contributing more to their 401(k)s and 403(b) plans then their peers across the tax-exempt and corporate sectors. On average, nurses have $64,000 in their retirement saving plans, compared to the $48,000 average balance among workers in the tax-exempt space and $62,500 among workers in the corporate sector workplace.
Ninety percent of nurses are also concerned about the medical costs in retirement. Nurses surveyed gave a fairly accurate estimate that healthcare costs would be around $185,000. Fidelity estimates a 65-year-old couple will need $215,000 to cover healthcare costs in retirement.
Goldman Sachs Acquires South Korean Asset Firm
Goldman Sachs is expanding its presence in the South Korean retail fund business with the recent agreement to acquire a South Korean asset management firm from majority owned Australia-based Macquarie Bank, Reuters reports.
The deal is expected to close later this year, subject to regulatory approval, Goldman officials said in a statement.
"This acquisition is a significant milestone for Goldman Sachs Asset Management in Korea, a growing financial hub with significant market potential," said Stephen Fitzgerald, head of GSAM International, in a statement. "Through this acquisition, GSAM will establish a meaningful presence in Korea."
In South Korea, Goldman has been focused on businesses with corporate customers and private equity investments, including its 9% stake in Hana Financial, the country's fourth-largest financial services group.
Terms of the deal include Goldman buying 100 % of Macquarie-IMM Investment Management's 65% stake in the South Korea firm and the remaining 35% stake from South Korea's investment firm IMM. The fund manager has around $10.78 billion in assets under management.
The deal's value was not disclosed. Based on the managed assets, the value of the acquisition is estimated at 120 billion to 180 billion won, which is between $130 million to $195 million.
Macquarie was enticed by Goldman's offer. "We were approached by Goldman," said John Larkin, a spokesman for Macquarie. "The offer was quite attractive, so we decided to accept the offer."
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