Vendor Payment Disclosure Under SEC Review

Should mutual funds be required to disclose the details of payments made to brokerage firms?The NASD says yes. But the SEC says it's not sure.An NASD rule requires detailed disclosure by funds of all payments made to specific dealers before the member firm is allowed to accept the money (see "NASD Disclosure Rules Ignored," Page 42). But that rule is being largely ignored.Meanwhile, the SEC says disclosure

Should mutual funds be required to disclose the details of payments made to brokerage firms?

The NASD says yes. But the SEC says it's not sure.

An NASD rule requires detailed disclosure by funds of all payments made to specific dealers before the member firm is allowed to accept the money (see "NASD Disclosure Rules Ignored," Page 42). But that rule is being largely ignored.

Meanwhile, the SEC says disclosure of the total amounts paid to all dealers in the prior year is good enough.

The agency made its argument in a legal brief filed on behalf of several clearing firms that were accused of fraud for failing to make adequate disclosure. The lawsuit involved disclosure of both 12b-1 fees and other payments.

A federal appeals court in July dismissed the class-action suit. The court deferred to the SEC's conclusion that disclosures made in the money funds' statements of additional information (SAIs) were sufficient.

Nevertheless, the court questioned the adequacy of current disclosures.

Rule 12b-1 and other fees were disclosed only in aggregate in a money market funds' SAI. And even then, the numbers were a year old. The SEC noted that an investor cannot tell from this type of disclosure whether his particular brokerage receives any fees or how much.

The SEC also stated in its February brief that it is reviewing its policies on disclosure. The agency would not comment on the progress of that review.

While the SEC has never given guidance on how payments from mutual funds to dealers should be disclosed, the NASD requires detailed disclosure.

Before a member firm can accept individually negotiated payments from a fund, the NASD requires disclosure of both the "name of the [brokerage] member and the details of the [fee] arrangements" in the fund's prospectus.

This requirement is contained in NASD Conduct Rule 2830(l)(4).

Yet brokerage firms continue to accept payments even though funds are not identifying who gets what.

RR checked a number of statements of additional information (SAIs) from major fund groups. SAIs sometimes disclosed 12b-1 fees, but only in aggregate. Other types of revenue-sharing fees were not always mentioned and never specified. No brokerage firms were named.

The NASDR confirms that payments must be disclosed in the prospectus in order for dealers to accept them.

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