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SEC Eyes Action on 8 Brokerages

Jan 14, 2004 | NEWSDAY Almost all of 15 brokerages investigated by the U.S. Securities and Exchange Commission apparently steered customers to certain mutual funds in return for special payments from those funds, Stephen Cutler, the SEC's enforcement chief, said yesterday.

The probe, which began in April, 2003 and covered a cross-section of the brokerage industry, found that 13 of the firms gave preferential treatment to mutual funds that paid them and kept the arrangements secret from customers, Cutler said in a briefing for reporters yesterday. As a result, the commission is considering civil enforcement actions against eight of the brokerages, as well as 12 mutual funds that paid them for preferred treatment. And at a meeting tomorrow , SEC commissioners will consider new rules requiring brokers to tell customers about such payments for "shelf space," as well as other fund costs and fees, SEC staffers said.

The SEC's investigation confirmed "what we already know," said Barbara Roper, director of investor protection for the Consumer Federation of America. "Broker-dealer distribution of mutual funds badly distorts the mutual fund marketplace in ways that drive investors' costs up, and increases the likelihood that they will be sold inferior funds."

Roper criticized the SEC for not banning fund payments to brokers altogether, a reform measure that the mutual fund industry's major trade group, the Investment Company Institute, recently recommended. The probe of the 15 firms provides "concrete evidence" that the SEC's approach of "let the market discipline costs" is "doomed to ineffectiveness," she said.

An SEC spokesman, John Nester said the SEC is still examining what to do about improper practices in the $7.2 trillion mutual fund industry, and "is not leaving anything off the table" in terms of possible remedies.

Mercer Bullard, head of Fund Democracy, an advocacy group for mutual fund shareholders, praised the proposed SEC rules, which would require disclosure in dollars of items such as payments to brokers before a fund sale occurs. Such disclosure "is precisely what we have asked for," Bullard said yesterday. "Currently, you can sell a fund on the phone, and never deliver a document until the confirmation goes out."

SEC officials wouldn't identify the brokerages that the agency investigated, but called them a "representative sample" of the brokerage industry in terms of their size and type of services they offer. They also wouldn't name the eight brokerages and 12 mutual funds that might be subject to enforcement actions.

Last November, Morgan Stanley, the nation's second-largest brokerage, agreed to pay $50 million to settle an investigation that found the brokerage took secret payments to steer customers to certain mutual funds. The SEC and the National Association of Securities Dealers, a self-regulatory organization for brokers that also participated in the probe, said at the time that they were investigating 15 other brokerages suspected of similar conduct. Morgan Stanley neither admitted nor denied wrongdoing.

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