Wachovia disclosed in its 10-Q SEC filing that the Commission was investigating the mutual fund sales and distribution practices at Wachovia Securities LLC. Specifically, the SEC was looking into revenue-sharing arrangements between the Charlotte, North Carolina-based Wachovia and various undisclosed investment companies.
“Wachovia believes the SEC is reviewing the adequacy of Wachovia Securities’ disclosures regarding revenue sharing arrangements with certain investment companies and Wachovia Securities’ mutual fund sales and distribution practices,” the number four U.S. bank said.
No further details of the investigation were provided in the filing.
The practice of “revenue sharing” involves fund companies making cash payments to brokers and other intermediaries for distributing mutual funds. Through these revenue sharing agreements, the intermediaries serve as a marketing and distribution channel for the mutual fund company (See Fee For All).
The widespread revenue sharing compensation practices in mutual fund firms have left the SEC wondering if investors are properly informed and the agency began its investigation into revenue sharing arrangement between brokerages and mutual funds in April 2003. Indeed, the SEC found fund advisors sometimes reward brokers for featuring their funds by directing brokerage trades to them and provide increased support to that broker over another (See SEC: ‘Revenue Sharing’ Rampant in Mutual Fund Sales ).
Responding to this, the SEC began to examine these arrangements in more detail at specific investment companies. In February, Sun Life revealed its Boston-based Massachusetts Financial Services Co. (MFS) unit was one of 14 fund companies reported to be on investment bank Morgan Stanley’s “preferred list.” Sun Life’s disclosure came after the November 2003 settlement between Morgan Stanley and the SEC on charges that the investment firm steered investors to some mutual funds in exchange for brokerage commissions and other payments.
This increased scrutiny by the SEC caught the eye of Marcy Supovitz, of Boulay Donnelly & Supovitz Consulting Group, Inc. Speaking in February at the American Society of Pension Actuaries (ASPA) 401(k) Sales Summit in Orlando, Florida, Supovitz said t he revenue sharing that goes on between fund companies and brokers will be targeted by reform and will result in less soft dollars and more hard dollars, as well as trustee-directed revenue sharing accounts
Further,Supovitz agreed with others at the conference and said that there are likely to be mandated disclosure of fees and revenue sharing agreements, but went further in suggesting that participant statements might also include fee reporting, so it is not only disclosed to the plan sponsor, but participants as well (See Revenue Sharing Still Unresolved Issue ).