SEC Details Abuses in Fund Sales Practices

One firm likely to be on the list, though, is Edward Jones, one of the nation's largest retail brokerages. In late December, the firm announced it would postpone the sale of its $150 million in limited partnerships, citing concern that changes in the regulatory landscape would have a negative impact on its profitability. Regulatory filings reveal that such payments generate tens of millions of dollars for Edward Jones each quarter.

Morgan Stanley was the first firm to be tainted by this issue. On Nov. 17, the firm agreed to pay $50 million to settle charges that it failed to tell investors about compensation it received for selling certain mutual funds. Morgan Stanley didn't admit or deny the charges, but the firm did agree to provide investors with greater disclosure regarding its relationships with mutual fund groups.

In addition to actions taken by its enforcement division, the SEC will discuss making such disclosure standardized.

Annette Nazareth, director of the SEC's division of market regulation, outlined two proposals that will be discussed on Wednesday. Both will require increased disclosure as to the nature of any revenue-sharing agreements.

The first will require that brokers disclose all contingent costs in the sale confirmation letter in both dollar figures and as a percentage of assets. That would include all sales loads, annual asset-based fees (such as 12b-1 fees), revenue-sharing payments and portfolio brokerage commissions. The confirmation -- which is sent out after the fund shares have been purchased -- also would have to include comparative data for funds in the 95th percentile as well as the median figures. "This is the first time we've suggested requiring comparative data be pushed to the customer," Nazareth said.

The second disclosure requirement proposed is one that would be made at the point of sale. Essentially all the same information would have to be provided to the potential investor at the time of purchase. Figures that can't be calculated in real time would be omitted, but brokers still would have to disclose what types of revenue-sharing arrangements they've made.

About half of the 15 broker-dealers investigated disclosed their revenue-sharing arrangements in some way. That disclosure ranged from simply noting the existence of a revenue-sharing agreement to specific references to the types of funds that make payments.