MFS Unveils "New Standards"

March 16, 2004 ( - In what it described as "new standards for the mutual fund industry", MFS Investment Management today threw down a new gauntlet.

The mutual fund firm, which along with a number of others has been embroiled in the mutual fund trading controversy, has announced a series of actions it is taking to tighten its fund governance and business practices.  The actions follow a review of the firm’s policies and practices.

“MFS has served generations of investors for 80 years and has a long history of leadership in the industry,” said Robert C. Pozen, non-executive Chairman of MFS Investment Management. “We are committed to doing what is right for the millions of shareholders who trust us to invest on their behalf. Today, we reaffirm that commitment by taking a series of specific steps to assure that the interests of our shareholders come first at MFS.”

Redemption Extension

MFS said it will expand the current 2% redemption fee on exchanges and redemptions made within 30 days of purchase to include MFS small and mid-cap funds.   The redemption fee is currently only applied to its international/global and high yield funds.   Additionally, MFS said it will expand the use of redemption fees to ALL other MFS equity and bond funds, except money market funds, by imposing a redemption fee on all exchanges and redemptions made within five days of purchase.

Boston-based MFS, a unit of Sun Life Financial Inc., last month settled state and federal regulatory charges of civil fraud with a $225 million fine and $125 million in fee reductions (See    MFS Scandal Settlement Finalized ). Then chief Executive John Ballen and President Kevin Parke were also banned for three years from serving as officers or directors of a mutual fund company, among other penalties.

“Hard” Lines

MFS reiterated its support for the proposed 4:00 p.m. “hard closing rule” to eliminate any possibility of late trading.   However, in an apparent acknowledgment to the concerns expressed on behalf of the retirement plan industry (see SEC Rethinking Hard Close Proposal ), MFS said it “recognizes that the industry must address a variety of complex issues before the solution can be implemented and pledges to work with clients, service providers and others in the industry to develop viable solutions.”  

MFS said it will continue to make “active use” of fair value pricing techniques to “produce more current prices on portfolio securities” to help prevent trading abuses.   The firm also said it will “significantly” increase monitoring staff, enhance systems capabilities and enforce restrictions.

Cost Concerns

With regard to concerns about fees and costs, MFS said it is:

  • Banning the use of brokerage commissions to acquire third-party research and market data services, and making permanent the firm’s current ban on the use of brokerage commissions to recognize fund sales.
  • Increasing commission recapture programs to further cut operating expenses paid by shareholders, while also building on its current use of commissions to defray custody costs, thereby lowering shareholder costs, according to the firm.

MFS also said it will:

  • Provide full expense disclosure of estimated expenses for each shareholder based on quarter-end holdings.
  • Provide a Web-based individualized expense calculator enabling investors to calculate their actual dollar expenses by inputting their MFS fund holdings.
  • Provide increased disclosure of portfolio turnover and brokerage costs.
  • Expand sales disclosure by providing more prominent disclosure of breakpoints (volume sales discounts) and cash payments by MFS to brokers.

Regarding concerns about board independence, MFS noted that MFS Funds already have independent board chairs and at least 75% of all trustees are independent, while adding that the independent trustees and the MFS funds now have their own independent counsel.    The independent trustees will also appoint an independent compliance officer who will be responsible for assisting the board and all of its committees in monitoring compliance by MFS Funds.  

MFS also noted the creation of two new positions – a non-executive Chairman and an Executive Vice President — Regulatory Affairs to improve its governance structure (see    Pozen Reported In Line for MFS Executive Slot ).