WSJ: MFS, SEC Reach Directed Brokerage Settlement

March 31, 2004 ( - The U.S. Securities and Exchange Commission (SEC) has reached a settlement agreement with Massachusetts Financial Services Co. (MFS) regarding payments the firm made to brokerage firms to favor MFS products at the same time the agency opened up investigations into payments received by Edward D. Jones & Co.

The $50 million penalty will be paid to settle charges MFS failed to disclose properly the payments it made to brokers to induce them to sell the company’s mutual funds.   In addition, MFS will pay an undisclosed disgorgement amount, the Wall Street Journal is reporting citing a “person familiar with the matter.”   A formal announcement on the settlement is expected later today.

With the settlement, the unit of Sun Life Financial Service neither admits nor denies wrongdoing in the matter.

The most recent settlement comes as the SEC widens its investigation into the trading practices of mutual funds, in this case into directed brokerage practices – the practice by which mutual fund trading commissions are directed towards the brokerage firms that favor a fund company’s products.   Regarding this practice, MFS’ new nonexecutive chairman Robert Pozen said recently the firm suspended its directed brokerage program in November and ended it permanently earlier this year (See MFS Unveils “New Standards” ).   Prior to the most recent settlement, MFS agreed to pay $225 million – and cut management fees – to settle federal and state civil charges that the company allowed market-timing arrangements in 11 of its mutual funds (See   MFS Scandal Settlement Finalized).

Boston-based MFS is not alone in the directed brokerage matter.   According to the Journal report, the SEC is investigating eight brokerage houses and a dozen mutual-fund firms that make payments to brokerage firms to push their funds.   This follows a November 2003 arrangement between broker Morgan Stanley and the agency.   In that deal, Morgan Stanley agreed to pay $50 million to settle charges that its sales force did not inform customers of such mutual fund sales incentives (See   Morgan Stanley Confirms Spitzer, SEC Fund Probe).

MFS was one of 14 companies on Morgan Stanley’s “preferred list” of mutual fund providers.

Edward Jones

St. Louis, Missouri-based Edward Jones yesterday disclosed in a public filing that the SEC was considering enforcement action against the company.   This after the agency examined payments the firm received from seven mutual funds it recommends most highly to customers, the Journal reported Edward Jones’s seven preferred fund groups are:

  • American Funds
  • Federated Investors Inc
  • Goldman Sachs Group Inc
  • Hartford Mutual Funds Inc
  • Lord Abbett & Co
  • Marsh & McLennan Cos’ Putnam Investments
  • Van Kampen Investments.

In the case of Edward Jones, regulators are examining revenue sharing arrangements – the practice in which fund companies agree to hand over part of their management fees to brokerage firms that favor its funds.   According the filing, Edward Jones received $89.9 million in revenue sharing last year, and $85.9 million in 2002.

Edward Jones has also received subpoenas or requests for information on the payments from the U.S. Attorney for the Eastern District of Missouri, the New York Stock Exchange, and the National Association of Securities Dealers (NASD). The NASD is also considering enforcement action, the Journal report said.

The examination into revenue sharing arrangements represents a paradigm shift in the brokerage industry where it wasconsidered legal for firms to receive payments from fund companies, provided the arrangements were properly disclosed.   Previously, brokers and funds have taken the position that vague disclosures buried in fund prospectuses are sufficient, but in the current regulatory environment those disclosures may need to be much more transparent.