The National Association of Securities Dealers has queried Janus Capital Group as part of a larger probe into deals between brokerage firms and mutual funds, the Denver money manager said Wednesday.
“We received a request for information from the NASD in October,” spokeswoman Shelley Peterson said. “They are looking into broker-dealer issues.” The NASD, a regulatory affiliate of the Nasdaq Stock Market, seems most interested in directed brokerage, where mutual funds give a brokerage firm securities trading business in return for distributing mutual funds.
That help can include covering commissions to brokers, putting funds on recommended lists and otherwise making sure funds get preferential treatment.
The practice is long-standing and widespread, but it is coming under fire after market-timing and late-trading scandals that have rocked the fund industry.
The concern is that directed brokerage can jade objectivity, primarily on the brokerage side, said Jeff Keil, vice president of Global Fiduciary Review at Lipper Inc. in Denver.
Keil said directed brokerage may influence “what funds are promoted, what funds have shelf space, what funds get recommended.” Mercer Bullard, director of fundholder rights group Fund Democracy, said all of those decisions may be affected by brokerage agreements. “The SEC should have cracked down on it. This is not disclosed in any meaningful way,” he said.
Janus does disclose that it allows directed brokerage deals.
“We generally don’t engage in this practice unless the benefit of doing so offsets expenses that would otherwise be payable by the funds,” Peterson said.
Janus also left itself some wiggle room should investigators uncover late trading in its funds by brokerage and clearing firms.
“Janus cannot exclude the possibility that one or more of those intermediaries submitted improper or unauthorized late-trade transactions to Janus in violation of Janus’ agreements with those intermediaries,” Janus said in its quarterly financial filing.
Late trading, an illegal activity, happens when fund orders are made and executed after mutual funds set their price at 4 p.m. Janus has denied that it knowingly allowed late trading.
Janus Capital also repeated an earlier disclosure that some offshore funds within its Janus International subsidiary had market-timing agreements beyond the dozen already disclosed in its U.S. based funds.
Although Janus downplayed e-mails from Janus International chief executive Richard Garland in which he appeared to OK a market timing agreement with hedge fund Canary Capital, it now appears that other agreements occurred under his watch, whether or not he knew it.