More Firms Confirm SEC 401(k) Probe Questionnaires

July 7, 2004 ( - T. Rowe Price, Capital Research & Management and Fidelity have joined Putnam Investments as confirmed recipients of a request for information from the Securities and Exchange Commission (SEC) in the agency's investigation into directed brokerage arrangements in company sponsored retirement plans.

The Wall Street Journal, in its Wednesday edition, is reporting approximately 24 mutual fund companies and investment advisors have received documented requests for information from the SEC in the last two weeks.   Predictably the firms that have acknowledged receiving the requests offered no information, saying only they were cooperating with the Commission.  

Also contained in the Journal report was a deadline for companies to respond to the inquiry:   the end of July.   Additionally, Janus Capital Group Inc said the firm has not received a request for any additional disclosures and Vangaurd refused to comment.

News of the inquiry first appeared over the July 4 th holiday weekend when McHenry Consulting issued a   client alert    detailing the examination of “industry compensation practices in the distribution of defined contribution retirement plan products and services.”  Included in the alert was a list of 25 questions sent to mutual fund companies by the SEC over the past several weeks – questions that, according to McHenry, “delve deeply into the who, what, why, how and “how much” of retirement product compensation.” 

Specifically enumerated in the request letter sent to fund companies are the SEC’s intention to examine “the reimbursements, rebates, subsidies and other payments that mutual funds and their advisors make as part of their participation in defined contribution plans.”  Additionally, according to text from the SEC letter included in the McHenry alert, “The examination will also review how DC Plan Payments are disclosed and whether Funds that directly or indirectly make larger DC Plan Payments receive different positioning in DC plans than those who pay less”  (SeeSEC Probes DC Revenue Sharing).

Investigation Origins

The SEC’s increased scrutiny on the practice of “revenue sharing” – a process involving fund companies making cash payments to brokers and other intermediaries for distributing mutual funds – evolved from an April 2003 SEC examination into why brokerage firms sell particular funds.   Through these revenue sharing agreements, the intermediaries serve as a marketing and distribution channel for the mutual fund company.  From this previous investigation, the SEC found “widespread evidence” that brokerage firms directed investors to specific mutual fund offerings as part of sales arrangements (See SEC: ‘Revenue Sharing’ Rampant in Mutual Fund Sales ).   Subsequently, SEC officials became concerned that the payments investment firms receive for offering specific funds might result in retirement plans offering funds that are not in the best interest of investors.

To delve into how pervasive the practice was in the 401(k) industry, the Commission developed the questionnaires that went out to various defined contribution plan providers. Among the 25 questions, according to the Journal’s report, the SEC is asking funds and their investment advisers todescribe all payments made to 401(k) plans, the benefits derived from those payments and whether increased payments resulted in better placement.   Additionally, the agency is interested in how all payments are agreed upon, where the money to make the payment comes from and whether the payments are disclosed to fund investors.