MutualFundWire.com
The insiders' edge for 40 Act industry executives!
an InvestmentWires' Publication
an InvestmentWires' Publication
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MutualFundWire.com
The insiders' edge for 40 Act industry executives!
an InvestmentWires' Publication |
|
Thursday, October 23, 2003 Were Funds in Cahoots With Brokers? The mutual fund industry’s bad day just got worse. The SEC is probing whether some mutual fund companies made deals to send trades to particular brokers if these brokers in turn promoted their funds to clients. Basically, the more trades a fund company sent a broker’s way, the more that broker would favor and tout that fund’s products. The SEC began its investigation several months ago, but now it seems as though the rooster’s come home to roost. Sources told the Wall Street Journal that 15 brokers are suspected of engaging in these practices, however it isn’t clear how many will be included in the SEC’s probe. If charged, the brokerages involved could face enforcement actions and fines for failing to disclose the arrangements to investors. They could also be in violation of NASD rules that forbid them from recommending funds on the basis of commissions. At the same time, the funds involved could face SEC action for violating rules that dictate how they are supposed to determine where to spend trading-commission money. Commissions come out of fund assets, making them investors’ money and managers are mandated to get the best execution (read: most cost efficient) for their buck. The fallout has already affected some Wall Street firms. Morgan Stanley is in hot water again after the company announced in a government filing that the SEC is considering bringing charges against it because of its relationship with several brokerages. In last week’s filing, Morgan Stanley made note of a relationship its brokers had with 14 fund companies whose funds would be favored in addition to in-house funds when their brokers made recommendations to clients. Deals like this one can fall into two categories: revenue sharing, in which funds help pay a broker’s marketing expenses or soft-dollar deals in which funds pay direct trading commissions to cover research by brokers. Not everyone agrees with these practices but they are legal by regulatory standards. But, promoting a fund because of the amount a broker will receive in commission isn’t. In the meantime, until formal charges are made, the SEC is considering pushing through new rules requiring that brokers disclose how they are paid. Printed from: MFWire.com/story.asp?s=6053 Copyright 2003, InvestmentWires, Inc. All Rights Reserved |