MFS Back Under Regulatory Scrutiny

February 18, 2004 ( - The hard hit US unit of Sun Life Financial Services is once again under the regulatory microscope - this time for directed brokerage and revenue-sharing arrangements.

In a US Securities and Exchange Commission (SEC) regulatory filing, Sun Life revealed that Boston-based Massachusetts Financial Services Co. (MFS) was one of 14 fund companies reported to be on investment bank Morgan Stanley’s “preferred list,” Reuters reported. In November 2003, Morgan Stanley agreed to pay $50 million to settle SEC charges that it steered investors to some mutual funds in exchange for brokerage commissions and other payments (See  Morgan Stanley Confirms Spitzer, SEC Fund Probe ).

Regulators said Morgan Stanley favored products offered by up to 16 fund companies out of more than 115 that its sales force could sell. This included placing certain funds on a “preferred list” that financial advisers were to look at first when making recommendations.

As a result of the probe into Morgan Stanley, Sun Life said in the filing that MFS has been “under investigation by the SEC relating to its directed brokerage and revenue-sharing arrangements with various distributors of its products, including Morgan Stanley.” Sun Life said it was cooperating in the probe and warned it could face further penalties.

Sun Life also said in its filing that its reputation could suffer “materially” as a result of probes into the US investment industry’s practices. “Sun Life Financial’s and MFS’ business is based on public trust and confidence and any damage to that trust and confidence could cause customers not to buy, or to redeem, Sun Life Financial’s or MFS’ products,” the insurer said.

Sun Life said it is also facing class-action lawsuits that allege the company allowed market timing and late trading. It said it is reviewing the allegations, but did not dismiss the possibility that more litigation could be ahead.

Ending weeks of negotiations, Sun Life said on Feb. 5, MFS, the oldest US mutual fund company, had agreed to pay $225 million to settle fraud charges involving trading in shares of its mutual funds (See Report: MFS Works Out Scandal Settlement ).

The company recently settled with US authorities for market timing. State and federal authorities have been probing market timing and late trading of mutual funds for months, and its investigations have led to several settlements in the $7-trillion industry.

The recently filed Mutual Fund Reform Act (MFRA) (See  Senate Fund Reform Bill Would Kill 12b-1 Fees )  as well as pending SEC proposals (See SEC Gives Tentative OK to 12b-1 Limits, Disclosure Rules   ) would ban directed brokerage practices. The text of the MFRA is  here .