The Boston-based mutual fund arm of Sun Life Financial Inc. is expected to reach settlements with U.S. regulators as early as next week over allegations it allowed improper trading practices, according to people familiar with the matter.
Massachusetts Financial Services Co. is already very close to an agreement with the U.S. Securities and Exchange Commission, which has accused the fund company of breaching its fiduciary duty and providing investors with “false and misleading” disclosure regarding its policies on market timing.
However, one source said that agreement has been delayed somewhat by separate settlement negotiations between the insurer and crusading New York State Attorney-General Eliot Spitzer. Mr. Spitzer’s office and the SEC, which are at the forefront of the wide-ranging investigation into trading abuses in the $7-trillion (U.S.) mutual fund industry, have worked closely together and have tended to unveil their settlements with fund companies simultaneously.
“The whole idea is to try to announce the settlement with the regulators at the same time, and that would be our objective too,” said one source close to Sun Life.
Last week, for example, the SEC and Mr. Spitzer entered into a $600-million settlement with Alliance Capital Management LP. Part of that sum $250-million was a straight financial penalty. The remaining $350-million, meanwhile, was what the fund company estimated it would lose by adhering to Mr. Spitzer’s demands to cut commission fees by 20 per cent over the next five years.
Sun Life is said to be resisting any wholesale agreement to slash the fees at MFS, which it argues are already substantially lower than those at Alliance. A recent analyst report suggested a 20-per-cent fee reduction at MFS could reduce Sun Life’s annual profit by about 1 per cent. The insurer has earned $1.1-billion in the first nine months of 2003.
Nick Thomas, a spokesman for Sun Life, declined to comment on the matter. An SEC spokesman refused to comment on any discussions with the insurer.
Although Sun Life is said to be close to resolving the issue, some observers believe the tight holiday schedule could prolong the settlements until just after New Year’s Day.
Sun Life is one of two Canadian companies that have been enmeshed in the mutual fund scandal. Manulife Financial Corp. confirmed on Tuesday that it has received a subpoena from Mr. Spitzer regarding market timing and late trading of funds. The insurer has also received information requests from the SEC, the U.S. National Association of Securities Dealers, and the Ontario Securities Commission.
Peter Fuchs, a spokesman for Toronto-based Manulife, said the company has not been placed under formal investigation by the U.S. regulators.
“They’re not accusing us of anything,” he said. “They’ve asked us for information and we’re complying.”
John Hancock Financial Services Inc., the Boston insurer that Manulife has agreed to acquire for $15-billion (Canadian), has also been caught up in the probe. The company has received a subpoena from the Massachusetts Securities Division, another key player in the investigations.
John Hancock has also received information requests from the SEC and the NASD. Both Manulife and John Hancock said in regulatory filings this week that they are conducting internal investigations into their mutual fund trading practices in the United States, and are co-operating with regulators.
One analyst warned yesterday that the regulatory probes could become a distraction for the two insurers as they attempt to consummate their proposed merger.
“While the outcome of these investigations is impossible to predict at this early stage, the introduction of these uncertainties in the midst of [Manulife’s] merger with Boston-based John Hancock is at a minimum unwelcome news,” Brad Smith, an analyst with Merrill Lynch Canada Inc., wrote in a research note. “While the investigations may yield no formal legal actions, the management time required to comply with information requests alone may cause delays in timing of the planned merger completion.” He noted that a proxy has not yet been mailed to investors, though the deal was unveiled three months ago.
As part of its commitment to co-operate with the SEC’s continuing industry probe, Sun Life recently tipped off the regulator about suspicious trading in one of its funds.
The SEC filed civil charges this week against Las Vegas-based Security Brokerage Inc. and its majority owner, Daniel Calugar, for allegedly attempting to defraud mutual fund investors through improper market timing and late trading.
He allegedly pocketed $175-million (U.S.) through these trading practices, primarily through funds managed by MFS and Alliance Capital, according to the SEC. MFS recently noted that Mr. Calugar was attempting to move $50-million out of one its funds, and contacted the SEC, said a person familiar with the investigation.
Market timing, in which investors trade shares at frequent intervals to cash in on minor price discrepancies, is not illegal, but most big fund companies restrict the practice or forbid it, since the trading can raise costs for the fund and hurt returns to shareholders.
Sun Life has already said the SEC would pursue civil charges against MFS for failing to police trading in 11 of its funds, even though prospectuses for these funds claimed the company actively discouraged market timing. Late trading, of which Mr. Calugar has also been accused, is illegal. In the latter case, investors will place a buy or sell order in a mutual fund after its price has been established at the end of the trading day. The idea is to buy at a “stale” price, and take advantage of market news that could affect the underlying fund.
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