State and federal regulators are close to hammering out a deal with one of the nation’s oldest mutual fund companies, Massachusetts Financial Services Co. (MFS), to settle allegations that the Boston-based firm failed to crack down on short-term trading that hurt ordinary investors, sources familiar with the talks said.
The settlement is likely to be similar to one worked out last month with Alliance Capital Management LP in that MFS likely will pay a large cash settlement to the Securities and Exchange Commission that will be used to compensate current and past customers while separately promising New York Attorney General Eliot L. Spitzer that it will lower fees for customers going forward, sources said.
However, two sources cautioned that the final terms of the agreement have not yet been worked out and that any deal must be approved by the five SEC commissioners and the top management of Sun Life Financial Inc., the Toronto-based parent of MFS. They said they do not expect an announcement until at least the middle of next week.
MFS spokesman John Reilly declined to comment. But MFS said in December that the SEC staff had recommended taking enforcement action against the company for allegedly lying to investors about the way it handled short-term trading known as market timing.
Spokesmen for Spitzer’s office and the SEC declined to comment.
Market timers move money rapidly in and out of mutual funds when they believe a fund’s share price does not accurately reflect the value of the fund’s assets. It is not illegal, but most funds say they discourage it because timers can siphon profits from longer-term investors. It can be illegal for a fund company to allow market timing if it tells the public it is not permitted.
MFS told investors that it would prevent timing that harmed other investors, but the company acknowledged in December that it did not police 11 of its largest funds for timing. The company said in December that “MFS believed that daily monitoring with respect to these large and highly liquid funds was unnecessary because MFS concluded that frequent trading in these funds would not be disruptive to portfolio management and harm fund performance.”
Spitzer’s office and the SEC disagreed with that assessment and have threatened to bring charges. There are no allegations that MFS insiders were engaging in timing or allowing investors to place illegal after-hours trades, the company said.