Mutual fund abuses ‘rampant’ – US regulator

WASHINGTON – Brokerage firms regularly take payments from mutual funds to tout their shares ahead of others, US regulators said on Tuesday, revealing a probe that showed 13 brokerages engaged in such “revenue-sharing” deals.

In another blow to Wall Street and the US$7-trillion mutual fund business, the regulators said they are investigating whether dozens of brokerages and funds “adequately informed investors of the conflicts of interest” of revenue sharing. The Securities and Exchange Commission, in a briefing on the findings of a nine-month inquiry, declined to name the 13 firms.Half of them, it said, kept their arrangements secret.”These revenue sharing practices … I believe, exist throughout the industry,” Lori Richards, director of the SEC’s Office of Compliance Inspections and Examinations, told reporters after an SEC press briefing on the probe findings.As scandals simmered across the $7-trillion fund business, the SEC was scheduled to hold a public meeting on Wednesday to consider a range of mutual fund reforms, including one focused on the revenue-sharing problem.The proposed rule would require mutual funds to spell out “the compensation and incentives of selling brokers” in confirmation statements received by investors.”The rule proposal tomorrow is going to give shareholders everything they could hope for and more in the form of dollar disclosure of all of these payments,” said Mercer Bullard, a fund investor advocate, former SEC staffer and securities law professor at the University of Mississippi.Wall Street brokerages handle almost two-thirds of the money that flows in and out of America’s roughly 8 000 mutual funds through share purchases and sales by investors.The Investment Company Institute, the fund industry’s lobbying group, has long supported “that incentives be disclosed to shareholders,” said ICI spokesman John Collins.On November 17, brokerage Morgan Stanley agreed to pay $50 million to settle charges it failed to tell investors of compensation it got for selling certain fund shares.Without admitting or denying the charges, Morgan agreed to disclose more about its relationships with mutual fund groups.-Nampa-ReutersThe Securities and Exchange Commission, in a briefing on the findings of a nine-month inquiry, declined to name the 13 firms. Half of them, it said, kept their arrangements secret. “These revenue sharing practices … I believe, exist throughout the industry,” Lori Richards, director of the SEC’s Office of Compliance Inspections and Examinations, told reporters after an SEC press briefing on the probe findings. As scandals simmered across the $7-trillion fund business, the SEC was scheduled to hold a public meeting on Wednesday to consider a range of mutual fund reforms, including one focused on the revenue-sharing problem. The proposed rule would require mutual funds to spell out “the compensation and incentives of selling brokers” in confirmation statements received by investors. “The rule proposal tomorrow is going to give shareholders everything they could hope for and more in the form of dollar disclosure of all of these payments,” said Mercer Bullard, a fund investor advocate, former SEC staffer and securities law professor at the University of Mississippi. Wall Street brokerages handle almost two-thirds of the money that flows in and out of America’s roughly 8 000 mutual funds through share purchases and sales by investors. The Investment Company Institute, the fund industry’s lobbying group, has long supported “that incentives be disclosed to shareholders,” said ICI spokesman John Collins. On November 17, brokerage Morgan Stanley agreed to pay $50 million to settle charges it failed to tell investors of compensation it got for selling certain fund shares. Without admitting or denying the charges, Morgan agreed to disclose more about its relationships with mutual fund groups.-Nampa-Reuters