WealthManagement Magazine

Major Firms Don't Disclose Non-Portability of Their Funds

While fund portability gets a lot of lip service, few brokerage houses are voluntarily disclosing whether their in-house funds can be moved."The industry seems to generally support portability, but in the last year there hasn't been much movement toward it," says Doug Scheidt, associate director and chief counsel of the Investment Management division of the SEC. "The question is, if firms aren't voluntarily

While fund portability gets a lot of lip service, few brokerage houses are voluntarily disclosing whether their in-house funds can be moved.

"The industry seems to generally support portability, but in the last year there hasn't been much movement toward it," says Doug Scheidt, associate director and chief counsel of the Investment Management division of the SEC. "The question is, if firms aren't voluntarily moving toward portability, should the Commission take steps to require disclosure?" Scheidt says the SEC is looking into the disclosure issue, but at this point simply gathering information.

Current disclosure language is ambiguous at best. A review of prospectuses from Smith Barney, Prudential and Dean Witter offers language that hints of portability buried deeply in the shareholder services sections.

PaineWebber states that shareholders can buy shares from "registered representatives and employees of dealers who have entered into a selected dealer agreement with Prudential Securities."

Smith Barney offers: "Purchases of fund shares must be made through a brokerage account ... an Introducing Broker or an investment dealer in the selling group."

Dean Witter says you can purchase shares through "other dealers who have entered into selected dealer agreements with the Distributor."

Nowhere in the prospectus is it disclosed who comprises the selling group or the dealer agreements. Nor is any mention made of what happens at redemption.

Pending any future SEC regulations, disclosure of fund portability will probably remain vague. Because portability pivots on special selling agreements between firms, the question becomes: What do you disclose and to what extent?

"I'm not sure disclosure is feasible," says Michael Udoff, secretary and assistant general counsel of the Securities Industry Association. "The whole thing turns on whether you have dealer agreements with other entities. What would you do? Say you can transfer funds to these 147 firms, but not to these 200 other firms?"

A spokesperson at the Investment Company Institute agrees. "It's like going to buy a bottle of aspirin with a big warning label that says, 'You can buy this aspirin cheaper at another store.' How many permutations can you go through?"

A few firms use fairly specific language concerning their funds' portability--or lack of it. "We make it very clear in the prospectus that the investor must be associated with a Schwab account," says a Schwab spokesperson.

Merrill Lynch offers more detailed language and breaks it down by class:

Shareholders considering transferring their Class A or Class D shares ... should be aware that, if the firm to which the shares are to be transferred will not take delivery ..., a shareholder either must redeem the shares (paying any applicable CDSC) ... or continue to maintain an Investment Account. ... Shareholders interested in transferring their Class B or Class C shares ... may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm.

Shareholders considering transferring a tax-deferred retirement account such as an individual retirement account ... should be aware that, if the firm to which the retirement account is to be transferred will not take delivery ..., a shareholder must either redeem the shares ... or continue to maintain a retirement account at Merrill Lynch for those shares.

Of course, by executing selling agreements, Merrill and any other firm can determine how many competing firms, if any, are able to accept delivery. These details of selling agreements are generally not covered in prospectuses.

Advisers, meanwhile, are dealing with the fallout from clients.

"None of my clients [transferring from wirehouses] who were invested in in-house funds knew that they weren't portable," says Robert Horowitz, CFA at New England Investment Management in Stamford, Conn. "Many of these people would not have purchased the funds if they knew about the portability issue. This is especially true of B-share funds. Many clients are shocked to hear that they were locked in for five years and can't move the fund."

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