Fund Scandal Implicates Stockbrokers

The mutual fund trading scandals headlines seemed to implicate mutual fund family executives and hedge funds—everybody but individual retail brokers and brokerage management. But a new survey by the SEC charges that brokers with abusive trading of mutual funds. An SEC inquiry alleges that a whopping 30 percent of brokers have helped clients evade their firms’ rules against late trading and market

The mutual fund trading scandals headlines seemed to implicate mutual fund family executives and hedge funds—everybody but individual retail brokers and brokerage management. But a new survey by the SEC charges that brokers with abusive trading of mutual funds.

An SEC inquiry alleges that a whopping 30 percent of brokers have helped clients evade their firms’ rules against late trading and market timing. The survey also claims that 25 percent of brokerage houses do not discourage market timing or late trading. The survey was presented to a Senate subcommittee hearing Monday afternoon, along with testimony from New York State Attorney General Eliot Spitzer. Senators at the hearing took the SEC to task after the allegations were made public, berating the regulators for failing to detect the violations earlier.

Indeed, the mutual fund abusive trading scandals were broken open by investigations by New York State and the Commonwealth of Massachusetts. Until recently, the scandals seem mostly focused on mutual fund companies and hedge funds. (The SEC inquiry also claims that 10 percent of the fund companies knew clients were late trading, an illegal activity.) Now the brokers are in the hot seat. Massachusetts and the SEC intend to charge five Prudential Securities (now Wachovia Securities) brokers and managers with civil suits alleging improper fund trading.

And with fingers now openly pointing at reps, the ante has just been upped.

A Wachovia rep says he hasn’t heard any feedback yet from the report, “but I certainly expect to. We were wondering when something like this was going to come down. We weren’t going to dodge this forever.”

Representatives at several major wirehouses were unavailable for comment Monday afternoon.

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