SEC Widens Mutual Fund Probe

October 23, 2003 ( - Stock and bond orders for mutual funds sales are the latest questionable transaction to catch the eye of the Securities and Exchange Commission (SEC).

The SEC is looking further into relationships between mutual fund companies and brokerage houses.   This time, the regulatory agency wants to know if brokerage houses were improperly influenced by mutual fund companies to sell their shares, according to a Dow Jones report.

The latest twist on the investigation that has been probing the mutual fund industry for a number of months is now examining whether some mutual fund companies agreed to direct orders for stock and bond trading to brokerage houses that in turn agreed to promote sales of the fund company’s products.

In all, more than 15 brokerage firms are being examined as part of the investigation, Dow Jones said citing people familiar with the investigation.   Even though specific firms were not named, one investment house that could be involved is Morgan Stanley.   This comes after a regulatory filing by the broker saying the SEC was considering bringing charges against it, partly on the ground that it allegedly favored certain fund companies based on brokerage commissions “received or expected” from them (See  Morgan Stanley Confirms Spitzer, SEC Fund Probe Ties ).

Earlier this month, SEC Chairman William Donaldson announced the agency was considering reforms in the mutual fund industry to curb late-trading activity and other potential skullduggery (See  SEC to Consider Post-Canary Scandal Trading Reforms ).   Among them were proposals to require the fund, and not intermediaries, to receive trades before the fund sets the day’s prices and additional requirements to reinforce funds’ and advisers’ obligations to comply with their fiduciary duties and to prevent the misuse of non-public information, including the selective disclosure of portfolio holdings information.