Federal regulators are proposing to ban special incentive payments by fund companies to brokerages and to provide fund investors more information on fees as part of a continuing response to investor abuses by mutual fund companies.
The Securities and Exchange Commission, which has been making a series of changes in rules governing the mutual fund industry, is promising "relief" to investors from fund abuses by early summer.
The five-member SEC was voting in a public meeting Wednesday to propose a ban on fund companies making special payments to brokerage firms for steering clients toward certain funds _ a long-standing practice that critics say creates conflicts of interest and drives up costs to investors. The proposal would be submitted for public comment for several weeks and likely adopted by the agency sometime afterward.
New bipartisan legislation being proposed by several senators also would outlaw the practice and others, significantly changing the way mutual fund companies conduct business with investors and the brokers who sell them funds.
The SEC move goes beyond a recent agency proposal to require that fund companies disclose such special arrangements to investors. An investigation by the agency found that the practice was rampant in the mutual fund industry and frequently undisclosed _ prompting officials to express outrage.
Investors can be hurt by the practice by being pushed into buying higher-cost or more poorly performing funds because brokers are rewarded for doing so, not because the funds are suitable for the investors.
The SEC commissioners also were voting to adopt a new rule requiring funds to provide investors a quarterly "shareholder report" with fuller information on fees and expenses.
The proposed ban on incentive payments to brokers is one of the most radical proposals advanced to date affecting Wall Street investment houses and the mutual fund industry. The funds have been ensnared in a scandal since revelations in September of trading practices that favor some big investors to the detriment of ordinary shareholders. Since then, top executives of several big fund companies have been charged; dozens of companies are under investigation.
SEC Chairman William Donaldson is said to support the move as a way to rebuild confidence in the fund industry among the 95 million Americans _ half of all households _ who entrust some $7 trillion to it.
"The SEC is continuing to write rules aimed at protecting mutual fund investors by initiating critical reforms in the mutual fund industry," agency spokesman Herb Perone said Monday. "These reform initiatives launched last fall should be in place by early summer and will provide mutual fund investors with relief this year."
The Securities Industry Association, Wall Street's major lobbying group, hasn't yet taken a position on the proposal. Its president, Marc Lackritz, has said disclosure to investors of arrangements between funds and brokers is the best way to deal with potential problems.
Stephen Cutler, the SEC's top enforcement official, disclosed recently that the agency is investigating numerous cases in which brokerage firms may have failed to fully disclose that they pushed clients to buy certain mutual funds in exchange for payments from the fund companies.
An SEC inspection of brokerages that sell mutual funds found that 14 of 15 received cash from funds' investment advisers and two-thirds accepted payments in the form of commissions on fund trades, a practice known as revenue sharing. In return for the payments, 13 of the 15 brokerage firms appear to have favored the affected funds by giving them greater visibility on their Web sites and in promotional materials sent to customers, SEC officials said.
The inspection found that for every $100,000 in sales to customers of favored funds, brokers pocketed between $50 and $400.