Securities America Fined For Directed Brokerage

The NASD has fined Securities America $375,000 for improperly sharing $280,000 in directed-brokerage commissions, plus other payments, with former broker Michael Bullock, a 16-year veteran of the firm who worked in the Los Angeles area. The NASD also said that Securities America failed to properly supervise Bullock to ensure that he disclose his directed-brokerage commissions to his union-sponsored retirement plan clients.

The NASD also separately charged Bullock for accepting those payments and not revealing them.

"NASD will vigorously challenge all conduct that impermissibly compromises a broker's objectivity, especially when retirement money is at stake," said James S. Shorris, NASD executive vice president and head of enforcement. "In this case, Securities America approved Bullock's improper arrangement to receive directed-brokerage commissions from mutual fund company portfolio transactions while advising his retirement plan clients to invest in this same mutual fund company's securities. This violation of NASD's rules governing mutual fund compensation, when coupled with the failure to disclose to the firm's clients the terms of his financial arrangement, made for an intolerable situation."

The NASD said this is the first time a fund company directed brokerage specifically for the benefit of an individual broker, rather than to obtain overall shelf space at a brokerage firm.

Mass. Probes Banks Over Sales of Complex Funds

Massachusetts Secretary of the Commonweath William Galvin is investigating Bank of America, Morgan Stanley, Citigroup and a number of other broker/dealers over sales of complex investments, particularly structured products and annuities, Reuters reports.

Products such as equity-indexed annuities are frequently expensive and carry penalties for early withdrawals.

"We are looking at this matter to put more attention on the rising popularity of these instruments because they are far more complex than buying a stock, and we want to be sure that customers are informed about the potential risks," said Brian McNiff, Galvin's spokesman.

401(k)s Plans Increasingly Turn to Collective Trusts

Attracted to the low costs of collective trusts, as well as the ability for investors to trade them daily at a time when many mutual funds are imposing short-term trading restrictions due to Rule 22c-2, 401(k) plans are increasingly turning to these alternatives, according to a white paper from AST Capital Trust.

Collective trusts can charge lower fees than mutual funds since they are expressly designed for 401(k) plans and do not have to meet the costs of servicing retail clients.

"It is no surprise that the popularity of collective funds has grown over the past few years," said Steve Ferber, executive vice president of collective fund services at AST Capital Trust.

"Institutional funds, like collective trusts and separate accounts, are increasingly popular with mid- and large-sized employers, as they are significantly less expensive than mutual funds," concurred Pamela Hess, director of retirement research at Hewitt Associates. "A seemingly small number of basis points saved over time can lead to meaningful differences in participant savings."

SEC Grants XShares Relief on Investment Cap

XShares Advisors has obtained regulatory relief from the Securities and Exchange Commission on the amount mutual funds can invest in its HealthShares family of exchange-traded funds.

SEC regulations prevent an investment firm from investing more than 5% of its total assets in a single investment company or 3% of its total outstanding voting securities in another investment company. The regulations also prevent an investment company from investing more than 10% of its total assets in two or more investment companies.

"The HealthShares ETFs, a series of 20 exchange-traded funds, will be the first in XShares' families of ETFs to be exempt from the investing limit set by Section 12(d)1," said Jeffrey L. Feldman, founder and chairman of XShares Group. "The relief will allow mutual funds greater flexibility in investing in HealthShares necessary to achieve their asset allocation and investment strategies."

Microsoft, R.R. Donnelley Working on XBRL Tagging

R.R. Donnelley and Microsoft have partnered to help mutual fund companies submit financial data in extensible business reporting language. R.R. Donnelley has been involved in the XBRL project since its inception and filed the first-ever mutual fund filing in May 2006, for Allegiant Funds.

Under the arrangement with Microsoft, R.R. Donnelley will provide a full-service XBRL solution to any mutual fund company interested in the Securities and Exchange Commission's pilot program, electronically tagging fund companies' financial statements using a mapping engine from Microsoft.

"We are delighted to offer this innovative solution to our mutual fund clients," said Eric Johnson, senior vice president of R.R. Donnelley Global Investment Markets. "We believe a full-service approach to new technologies like XBRL will ease the transition for our clients. Working with a technology leader like Microsoft gives us the ability to stay at the forefront of the latest changes in financial reporting."

Hedge Funds Up 5.25% In 2Q07: Morningstar

Hedge funds that reported their second-quarter returns to Morningsar, which manages a database of 8,000 hedge funds, rose an average of 5.25% in the quarter, slightly underperforming the S&P 500's 5.81% rise and the MSCI World Index's 5.82% gain. Year-to-date, hedge funds are up 7.77%, beating the S&P 500's 6% return but falling short of the MSCI World Index's 8.01% gain.

Although talk of market corrections in emerging markets has been gaining steam, hedge funds that specialize in this area posted the largest gains, 9.7%. Among those, China, Russia and Brazil funds fueled strong performance.

Managed futures hedge funds recovered from a lackluster first quarter, producing a mean total return of 6.82%. Other strong gainers were equity net long and equity variable funds, rising 5.84% and 4.87%, respectively, as well as event-driven and merger-arbitrage funds, up 4.82% and 3.45%, respectively.

"Overall, all hedge fund categories produced consistent returns and continued to contribute positively to 2007 year-to-date returns," said Morningstar Hedge Fund Analyst Carey Teichman. "Strong economies in emerging markets and a rise in global equities pushed hedge fund returns upward for the year."

U.S. Leads World in IPOs, But Subprime Gives Pause

The U.S. initial public offering market is booming and has raised more capital than any other country thus far this year, according to the Australian Financial Review. Blackstone Group's IPO, in fact, is the biggest deal in the U.S. in five years, raising $4 billion.

China is right behind the U.S. and decreased the gap from last year's 9.9% market share difference to 4.2%. China's global IPO market has been successful due to sectors starting to go public, such as media, consumer products and retail. Russia and Brazil took the third and fourth spots for IPO offerings.

However, the recent concerns surrounding the subprime mortgage market have made some global companies hesitant in offering shares in the U.S.

Stock Markets, Specialists At Odds on ETF Listings

Interested in the potential trading volume exchange-traded funds can bring to an exchange, stock markets are now vying with the New York Stock Exchange and the American Stock Exchange for ETF listings, The Wall Street Journal reports.

At the same time, however, many specialists on their trading floors are eschewing ETFs because they are thinly traded and, with so many ETFs flooding the market, are taxing the seed money that specialist market-makers typically pony up to get them up and running.

"Some specialists have balked, and the ETF providers have had to invest their own start-up capital," said Morningstar Analyst Sonya Morris. "That problem is compounded by the fact that specialists are a dying breed, since most stock trading systems are going electronic.

"If a new ETF is not adequately funded, it could have trouble attracting investors," Morris continued, "and if assets are low, the ETF might have trouble keeping expenses down. It could also cause a widening of the bid-ask spread, another cost of investing."

Stock markets are responding by offering incentives to specialists to handle thinly traded securities, as Nasdaq did earlier this month when it announced it will create an ETF unit whose key function is to provide liquidity, particularly during a new ETF's initial listing.

While Nasdaq handles the fewest number of ETFs of any exchange, 20, it does trade the PowerShares QQQ Trust, which has helped boost its market share of ETF trading year to date to 47.1%. The NYSE and its electronic trading platform, NYSE Arca, have handled 48% of ETF trading volume so far this year, and the Amex, while it trades the largest number of ETFs, has only a scant 3.1% share of the volume.

Young People Focusing on Careers, Not Retirement

Many twentysomethings are more focused on obtaining a higher-paying, fulfilling career than they are on saving for retirement, The Wall Street Journal reports. They're ignoring the mutual fund industry's exhortations to start saving early, to take advantage of the power of compounding.

Brett Bisciotti, for example, is saving as much as he can from his job at a delicatessen with the hopes of one day buying it.

"If you're not born with a silver spoon in your mouth and you want to make it, you gotta use the money you have now to go to the next level," he reasons.

Jascha Ephraim, an aspiring music composer currently working part-time as a construction worker, said he cannot consider saving for retirement until he pays off student loans and credit-card debt from a concert tour.

"I have faith that if I put all my energy into doing what I love, I will be more successful than if I were doing something that makes more money now, but I hate," Ephraim said.

Funds Lower Minimums For Twentysomethings

While most mutual fund companies require four- and sometimes five-figure minimums to invest, they are increasingly offering far lower minimums to people in their 20s and 30s, The Wall Street Journal reports. On top of that, they are inundating them with such all-in-one products as target-date funds, online tools, easy-to-enroll individual retirement accounts and solutions for financial concerns other than retirement, such as paying off student loans, saving for a house and planning for their children's college tuition.

Among those targeting younger investors are Charles Schwab, American Century Investments, Fidelity Investments, T. Rowe Price and Vanguard Group.

But there are drawbacks. As funds-of-funds, target-date funds tend to charge higher fees and could hold too much fixed-income and other conservative investments for young investors. In addition, some investment firms charge additional fees for low-balance accounts.

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

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