The SEC is considering whether to change a rule that could require brokers to reveal whether they have “shelf-space” programs, which treats certain fund companies preferentially in exchange for payment by the fund. Its first point-of-sale disclosure rule had pushed for brokerage firms to reveal the actual amount that they received from fund companies that take part in shelf-space programs. Most brokerage firms, however, are still not abiding by this standard, usually only disclosing the amount that they receive from an agreement without naming the fund company involved.
Even though many brokerage firms are informing investors about any “shelf space” agreements they have with specific mutual funds, most of them are still not disclosing the terms of these agreements. Although brokers are not directly paid by the agreement, a shelf space deal can indirectly influence the sale. For example, according to Merrill Lynch & Co. Inc., funds that do “not enter into [shelf space] arrangements … are generally not offered to clients.”
Shelf space agreements can vary, although most of the bigger firms receive anywhere from 0.05% to 0.25% of sales or assets. Brokerage firms claim this money supports education, sales, and technology.
An example of the kinds of agreements that exist is the deal between Edward Jones and some of its mutual fund companies. Edward Jones, which paid regulators $75 million for allegedly not making adequate disclosures, is one of the firms that now discloses what it collects each time:
· American Funds pays 0.03% of assets
· Federal Investors Inc. of Pittsburgh pays 0.25% on existing assets and new sales
Legal liability has compelled dealers to reveal some of the conflicts involving shelf space fees, information, and transactions, which used to take place under the table.
The SEC reached a settlement with Smith Barney regarding shelf space payments in 2005, after accusing the firm of not providing enough information regarding the “magnitude of revenue sharing payments” with their disclosures.
Mutual funds that the SEC has gone after include MFS Investments, Putnam Investments, Pimco Funds, and Franklin Templeton Distributors Inc.
Although securities regulators have created law and regulations to protect investors, incidents will occur when these laws are disregarded and investors will experience losses as a result. In order to recover what they’ve lost, an investor must file a claim. Having an experienced attorney represent you in this matter will increase the chances of recovery.
Shepherd Smith and Edwards can help you file your recovery claim. Our attorneys have the experience to represent you against brokerage firms, whether negotiating a settlement during securities arbitration or in court. Contact Shepherd Smith Edwards & Kantas LTD LLP, and your first consultation is free.
Brokerages slow to reveal sales pact details, Investment News, February 19, 2007
Related Web Resources:
Attorney General Lockyer Files Major Securities Fraud Lawsuit Against Edward Jones:
Documents Detail How Secret Mutual Fund Payments Conflicted With Investors’ Interests, Office of the Attorney General, State of California, December 20, 2004
U.S. Securities and Exchange Commission