Brokers Settle With NASD Over Improper Fund Sales

The NASD has settled with four brokerages over improper mutual fund sales. Combined, they are paying fines of $1.2 million.

For improper sales of Class B shares, MML Investors Services is paying $473,000 and NYLIFE Securities $354,000. Securities America is paying $322,000 for improper sales of Class B and Class C shares. The NASD is fining Northwestern Mutual Investment Services $100,000 for not having adequate supervisory systems and procedures to ensure that client received net asset value (NAV) pricing under NAV transfer programs.

The regulator said MML also failed to have similar supervisory systems, but did not impose a fine on the company since it took remedial actions to correct this prior to the NASD's detection. The regulator said it reduced Northwestern's fine since it immediately took steps to improve its NAV transfer systems after an NASD examination.

In addition to these fines, MML and Northwestern must pay remediation to customers who qualified for but did not receive the benefit of available NAV transfer programs. For MML, that is $2.56 million, and for Northwestern, that is $2 million.

"The cases announced today are the result of NASD's continuing commitment to help ensure that sales of mutual funds are made appropriately and with the benefit of full consideration of all available share classes and pricing features," said James S. Shorris, NASD executive vice president and head of enforcement. "These firms failed to implement reasonable supervisory procedures to ensure that these considerations were addressed on a consistent basis."

Shorris added that the NASD hopes that its decision not to fine MML for supervisory system violations and to reduce Northwestern's fine so considerably "will encourage other firms to increase their efforts to proactively identify compliance problems."

SEC to Distribute $37M to Columbia Funds Investors

The Securities and Exchange Commission will distribute $37 million in fair funds to 300,000 Columbia Funds investors whose holdings were affected by market timing between 1998 and 2003. It is the first of five fair funds distributions totaling $140 million that the SEC is making to Columbia Funds investors.

"The Commission has now returned more than $1.8 billion to injured investors through fair fund distributions in multiple cases," said Linda Chatman Thomsen, director of the division of enforcement. "This first distribution from the Columbia fair fund marks another significant step in our continuing efforts to distribute fair funds to mutual fund investors."

The SEC brought its case against Columbia Management Advisors and Columbia Funds Distributor in 2005, for which the companies paid $70 million in disgorgement and $70 million in penalties.

Galvin Questions UBS Over Hedge Fund Perks

Massachusetts Secretary of the Commonwealth William F. Galvin has accused UBS of "dishonest and unethical business activities" by giving hedge fund managers perks in order to get their lucrative trading business, according to The Boston Globe.

UBS Securities gave investment managers office space at discounted rents, a personal line of credit, tickets to sporting events and other perks, Galvin charged in an administrative complaint.

The complaint states that UBS created potential conflicts of interest and violated a number of securities regulations. UBS declined to comment, and a spokesperson stated it is reviewing Galvin's filing.

Galvin said that UBS provided office space to hedge funds at its expensive office locations at discounts as high as $40,000 a year. Managers who failed to produce for UBS ran the risk of being kicked out, according to the suit.

"Either we kick them out now or give them six to nine months and tell [them] we need to try to get more revenues," wrote Michael Torrisi, executive director of UBS prime brokerage services, in an internal e-mail about a hedge fund tenant, according to the lawsuit.

The suit does not detail how much trading business the hedge funds directed to UBS in exchange for the perks.

Entertainment benefits also occurred. The suit said that Torrisi charged thousands of dollars to meals and sport tickets to his corporate credit card for hedge fund tenants. Galvin alleged that Torrisi charged more than $1,300 worth of food at Fenway Park to his corporate card during a Boston Red Sox versus New York Yankees game. Among the guests were employees of three hedge fund tenants who were listed on his expense report, the suit notes.

Edward Jones Overlooked Investors in Settlements

Although in April, Edward Jones proposed settling investor lawsuits over hidden revenue-sharing agreements for $127.5 million, the firm is now trying to postpone approval of that settlement from July 20 to Oct. 1, the St. Louis Daily Record reports.

The reason, Edward Jones said, is that due to "computer programming errors," it overlooked 300,000 investors, and that instead of sending out the payments to 5.7 million investors, six million need to be accounted for.

Edward Jones had proposed paying investors $127.5 million in vouchers to settle class-action lawsuits that it accepted revenue from mutual fund companies in exchange for recommending their funds.

The firm said it would pay current customers $72.5 million in credit vouchers and past customers $55 million in cash. That meant that current customers would be eligible for $18 in vouchers and former customers $16 in cash.

Edward Jones investors filed nine class-action lawsuits in federal and state courts two years ago after the firm paid $75 million in fines to Missouri, the Securities and Exchange Commission and the NASD.

Managers Focus on Global Issues at Morningstar Meet

The opening salvoes of the Morningstar conference resounded with discussions of oil prices and offshore investing, according to U.S. News & World Report.

As for oil, Dan Rice of BlackRock expects crude prices to hover at least around $50 to $60 per barrel, although most stock prices assume the cap is about $53. Meanwhile, Fidelity Select Energy and Select Energy Service Fund manager John Dowd said demand from China could push it about $70 per barrel, especially with the steep cost of exploration and tight demand for antiquated refineries slowing the time to market.

China will also drive up the price of coal, according to Rice. This year, China became a net importer of coal, as domestic energy demand increased. "That will spread to the rest of the world," Rice said.

David Herro, manager the Oakmark International and Oakmark International Small Cap funds, and who is held in high esteem by Morningstar analysts, said he shies away from Japanese stocks. Toyota, for example, aims for a return on equity of 10% per year, compared to 16% or better among its American counterparts. The reason? Toyota's higher ups are worried shareholders might profit too much. "It's a great car company. It's a great manufacturer, but do they really care about their owners?" he asked.

Herro also said the major drivers that have pushed European returns are waning. Latin America, he said, is not for the faint of heart. "It's kind of hard to even find names, unless you like risk," he said.

Fundamental Indexing Not As Successful as Touted?

Fundamental indexing has had the mutual fund industry excited about the investment idea, but early returns from one of the most major fundamental indexing shops, WisdomTree Investments, have not been stellar, according to Dow Jones.

Conventional index funds have been around for 30 years and aim to match market results, betting that they will be able to beat most stock-picking mutual funds over time. Recently, a number of prominent index fund critics have argued that these funds are flawed because traditional indexes weight companies by market capitalization, or the total number of their outstanding shares, instead of fundamental measures such as company's earnings or dividends.

Last month, WisdomTree gave a glimpse into how the 20 original ETFs actually performed since their one-year inception. The results showed that WisdomTree may have to wait a while longer before putting conventional indexing company giants such as Barclayls, State Street Corp. or Vanguard Group out of business. However, the returns are preliminary, and, ideally, investors should look three to five years to make a sound judgment.

WisdomTree's basic domestic style funds lagged ETFs that track conventional indexes from those three competitors basically across the board. The international funds performed better than domestic funds, outperforming other popular ETFs in a number of categories, but still, returns were mixed.

For the domestic funds, results were the same whether WisdomTree funds were compared to competitors' balanced funds or value-oriented funds. Critics of fundamental indexing commonly state that fundamental ETFs are similar to value funds. The international funds were compared only to competitors balanced funds because there are few international value ETFs available to investors.

Nonetheless, the company is "very, very pleased" with its one year results, said Bruce Lavine, president of WisdomTree. He emphasized what he considers strong returns by a number of its international funds.

Guaranteed Income for Life Top Goal of Most Boomers

According to a poll sponsored by AIG SunAmerica and conducted by Harris Interactive, 97% of Baby Boomers believe guaranteed income for life is their top retirement goal, followed by protection against investment losses and enough income to meet rising healthcare costs. Three-quarters said they would be interested in a product that could provide guaranteed income for life, and two-thirds said they would be willing to pay up to 2% of investment returns for such a product.

"Baby Boomers have changed the retirement conversation in this country," said Jana Waring Greer, president of AIG SunAmerica Retirement Markets. "They are no longer talking about building a retirement portfolio; they are asking for help in investing it, protecting it, managing it and stretching it across the remainder of their lives." This is creating a "sweet spot" and an "enormous opportunity" for insurance companies that offer annuities, she said.

Security Benefit Acquires Rydex Investments

Rydex Investments has agreed to be acquired by Security Benefit for an undisclosed amount, bringing the combined organization to around $35 billion in assets under management and $52 billion of assets under administration

"The combination of Security Benefit and Rydex leverages an existing successful relationship into a catalyst for broader solutions, through sophisticated asset and risk management skills, compressive products, options and choices and an ever-widening array of traditional and non-traditional capabilities," said Kris Robbins, Security Benefit president and chief executive officer.

Rydex will retain its current management team and location in Rockville-Md., and operate as a new and separate line of business under Security Benefit's holding company. Rydex currently has 263 employees and manages more than 80 mutual funds, 25 exchange traded products and 55 institutional products.

Security Benefit has 825 employees and provides individual and employer-based retirement programs as well as institutional investors with a diverse array of investment options, including specialty fixed income, domestic and global equity strategies in separate accounts and mutual funds.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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