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SEC Investigates Edward Jones’ Fund Sales

SEC Investigates Edward Jones’ Fund Sales

Edward Jones—a firm that hasn’t attracted much regulatory scrutiny over the years—has been under considerable fire of late, thanks mainly to previously undisclosed revenue-sharing arrangements. The company has been loath to make public statements, but one thing it can’t avoid is its yearly 10-K filing to the SEC. The filing was full of interesting tidbits.

Perhaps most startling was Ed Jones’ admission that the SEC is “seriously considering” regulatory action against the firm because of its revenue-sharing arrangements. The SEC is investigating whether the firm’s arrangements are in violation of NASD rules, specifically those involving disclosure of fund practices to clients. The filing says that the firm received official letters of inquiry from the SEC in January and has subsequently heard from the NASD, the New York Stock Exchange and the U.S. Attorney General’s office. Revenue-sharing agreements are not illegal, but the SEC says they have to be fully disclosed to clients. In January, the SEC said it had found revenue-sharing arrangements in place at “13 of the major 15 brokerages,” and that “half” of those brokerages did not disclose them to clients.

The firm had no public comment but has released a statement confirming that it received the inquiries and is “cooperating fully.”

Not surprisingly, the filing warned that the firm’s earnings could be impacted “significantly.” “Any reduction in the revenues from [mutual fund sales] could have a material adverse impact on the company,” it said.

Edward Jones has long been considered one of the more scandal-free firms, and its reps continuously give it the best ratings in the annual Registered Rep. Broker Report Card survey, which appears each December.

“It looks like they were doing the same stuff as everybody else,” says Andre Cappon, president of CBM Group, a New York-based consultant in the financial services industry. “They just hid it better. But it’s out now. But I think this scandal is a temporary hiccup. They still have a superior business model.”

Other tidbits from the filing:

***The revenue-sharing arrangements, now in jeopardy, have proved quite profitable for the firm. Last year, Edward Jones notched $89.9 million through the arrangements in 2003 and $85.9 million in 2002.

***In January, managing partner Doug Hill said that 41 percent of Edward Jones’ revenue came from the mutual fund arena. The 10-K reveals that number to be even higher: 57 percent of the firm’s revenue in 2003 came from mutual fund sales and services.

***Overall revenue for the firm increased 12 percent in 2003, to $2.481 billion. Commission-based pay scales accounted for 67 percent of the firm’s revenue, with fee-based pay scales picking up the other 33 percent. Operating expenses increased 10 percent as well.

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