SEC: 'Revenue Sharing' Rampant in Mutual Fund Sales

January 13, 2004 ( - Widespread "revenue sharing" compensation practices in mutual fund firms have left the US Securities and Exchange Commission (SEC) wondering if investors are properly informed.

>Unveiling the results of a probe into how mutual fund companies promote their own funds, the SEC said 14 out of 15 brokers received “revenue sharing” – cash payments for selling mutual funds – from mutual fund companies and, not surprising, 13 of the 15 seemed to have favored funds making such payments.   Additionally, the SEC found fund advisors sometimes reward brokers for featuring their funds by directing brokerage trades to them, according to a Dow Jones report.

>For example, a broker s elling a new $100,000 fund investment might generate $50 to $400 from the mutual fund up front.   Additionally, provided the investor remained in the preferred fund, the broker may see residual payments of up to $250 a year.

>The SEC, which began its investigation into revenue sharing arrangement between brokerages and mutual funds in April 2003, overall found the practice to be fairly common.   But commonality only raises questions for the SEC in how investors are informed about possible conflicts of interest that might occur when a broker is paid to favor certain mutual funds over others.

>Stephen Cutler, the SEC’s director of enforcement, said the agency currently has eight active investigations of broker-dealers and 12 investigations into mutual-fund families for failing to adequately inform investors of the revenue-sharing deals.

In one high profile case that concluded in November, brokerage house Morgan Stanley agreed to pay $50 million to settle charges that it failed to tell investors about compensation it received for selling certain mutual funds.   Additionally, without admitting or denying the charges, Morgan Stanley agreed to provide more disclosure about its relationships with mutual fund groups ( See Morgan Stanley Confirms Spitzer, SEC Fund Probe Ties ).