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SEC Vows To Force Mutual Funds To Disclose Payments To Brokers

Jan 14, 2004 | Investor's Business Daily The Securities and Exchange Commission declared war Tuesday on the widespread practice of brokers receiving payments from mutual fund companies to push their funds and not telling investors about the payments.

The SEC's director of market regulation, Annette Nazareth, said at a news conference that two new rules would be proposed at today's regular commission meeting.

One would require brokers to disclose the so-called revenue sharing agreements with mutual fund companies at the time of sale. The disclosure must be in dollar terms and the percent of assets.

The second rule would require even more disclosure on the investor's confirmation statement. It would require the broker compare the payments to industry norms for such payments.

The rules couldn't go into effect until after a comment period and final SEC action.

The proposed rules come after a nine-month SEC inquiry found 14 of 15 brokerage firms received cash from mutual fund companies and 13 of the 15 brokers pushed funds that made such payments.

About half the brokerages paid their brokers more for selling in-house funds or funds making payments.

Only about half the brokerage firms disclosed the payments to customers. And those disclosures ran from generic statements that payments may have been received to more specific references.

SEC investigators found the payments ranged from 5 to 40 basis points (a basis point is one-hundredth of a percent) on sales and up to 25 basis points in assets annually.

That means on a mutual fund sale of $100,000, the broker could get as much as $400 plus up to $250 annually if the investor held the fund.

The payments are made for providing "shelf space" on fund supermarkets operated by brokers such as Charles Schwab and Fidelity Investments. Or they may be for access to the broker's sales staff or to get on broker's recommended list.

Stephen Cutler, the SEC's enforcement director, said he has eight on-going investigations into brokers and 12 investigations into mutual fund companies for failing to disclose the payments.

He declined to name any of the companies under investigation.

Last November, Morgan Stanley agreed to pay $50 million to settle SEC charges that it didn't disclose to customers payments it received from mutual fund companies.

The SEC's new cause marks the first time the national Wall Street watchdog has beat to the punch New York Attorney General Eliot Spitzer in a major thrust against the financial services industry.

John Collins, a spokesman for the Investment Company Institute, said the industry group for years has urged the National Association of Securities Dealers to require disclosure of payments by mutual fund companies to brokers. But the regulation hasn't been adopted.

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