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Look out, insurance companies and banks. The state of New York is coming after you next.

In his opening remarks at the SIA’s Mutual Fund Reform and Public Trust conference, David Brown, bureau chief of investment protection in the New York Attorney General’s office, said insurance companies who sold mutual funds wrapped in variable annuities, along with banks and law firms, may end up becoming targets of Eliot Spitzer’s ire in coming months.

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“These are old people who didn’t sign up to go head-to-head with professional arbitrageurs,” Brown said of those who bought variable annuities. Brown also talked of wanting more “proactive” measures from fund companies in reporting whether they have market-timing or late-trading issues at their particular firms.

He also said the recent investigations into mutual funds, including disclosure of late trading violations and what some consider ethically suspect market timing has generated positive responses from investors moving to funds considered “cleaner” by the investment community.

“The bar hasn’t just been raised on this a notch or two,” he said. “It’s been moved to a new stadium, and raised. It’s not going to be enough for lawyers to say, ‘This is a gray area.’ If you want to be one of those receiving capital, it’s better to say, ‘Don’t go near that line.’ ”

His remarks weren’t the only salvos fired at this conference, which was originally scheduled by the SIA when the market timing and late-trading abuses came to light in the press a few months ago, but have lately been usurped by greater concerns about mutual fund sales practices, including revenue sharing, preferred vendors on broker/dealer’s shelves, directed brokerage and 12b-1 fees.

Despite the genteel, mannered conversation among panelists, the discourse exposed ongoing differences between lawyers from the self-regulatory organizations and those representing investing companies. Joshua Kans, special counsel in the SEC’s division of market regulation, discussed at length the need for additional disclosures related to mutual fund costs that go directly to intermediaries—sales loads and 12b-1 fees—which in one year recently totaled nearly $20 billion.

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He talked of the SEC’s intentions to call for additional disclosures of these fees as well as hidden costs such as educational events for registered reps, rejecting the notion that those things were merely the cost of doing business, saying that there is conflict embedded in all of those cases. “If a certain broker/dealer gets payments for certain fund groups, it doesn’t take a lot of imagination for a broker/dealer to see it has incentives to favor those groups,” Kans said. He talked of the SEC’s desire to see more disclosure of these hidden fees, making them more transparent, and identifying revenue sharing to make it more transparent. The SEC is currently in a comment period on a proposal to improve disclosure of mutual fund transaction costs.

Weighing in with the counterpoint was Robert Zack, general counsel for the Oppenheimer Funds, who, after offering praises to the SEC and NASD lawyers present with him on the stage, took the established viewpoint that performance and risk remained the first ways to evaluate funds.

“We may risk creating a disclosure regime so complicated that we may foreclose many investors from investing in mutual funds at all,” he said. Indeed, some participants shared his view, with questions directed to the SRO lawyers about what “constitutes” an effective measure of disclosure. Kans replied that there wasn’t necessarily an econometric measure of the benefits of added disclosure.

One comment made by Cynthia Fornelli, deputy director in the SEC’s division of investment management, encapsulated the tussle between the regulators and the financial services companies. Asked by Barry Barbash, partner at Shearman & Sterling, about the general tone of comment letters related to the SEC’s proposal for additional disclosures about the risks of market timing, and the potential for redemption fees for frequent traders in and out of mutual funds, she said, “The most pervasive theme is that people don’t like the proposal.”

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