Sec Investigates Mutual Fund Rebates ‘Soft Dollar’ Arrangements Are Target Of Probe
The Securities and Exchange Commission has about a dozen investigations pending to see if mutual funds and investment advisers have improperly pocketed rebates from the brokerage firms handling their trades, a top SEC official said Friday.
“We’ve been finding an increase in the number of violations as well as the egregiousness of the violations,” said Carmen Lawrence, the Securities and Exchange Commission’s New York regional director. “While it’s not a new area of focus, there seems to be an increase in abusive activity in the last couple of years.”
At issue are so-called “soft dollar” arrangements between mutual funds and brokers who handle the lucrative business of trading for the funds. Mutual funds pay brokers for such services, but Wall Street firms also compete for the business by offering free services to the funds in the form of a rebate, ranging from stock research to free custodial services for stocks.
The soft dollar arrangements are legal under federal securities laws so long as fund shareholders share in the benefit of the rebates. And the SEC recently required mutual funds to disclose such arrangements to their shareholders in order to lessen the apparent conflicts of interest.
Lawrence said while securities laws allow such arrangements “to be used to pay for research to benefit clients, it’s an impermissible use to pay for rent, utilities and overhead expenses.”
Lawrence said SEC examiners have been “finding a substantial amount of abuse in this area” in their inspections of mutual funds and investment advisers, the people who help guide investment strategy for funds. Lawrence added that “close to a dozen or so” such cases are under investigation. She declined to identify the funds or advisers under review but said the cases will be brought within the next several months.
John Collins, spokesman for the Investment Company Institute, the fund industry trade association, said he was not aware of the SEC’s concern in this area. However, the ICI supports disclosure of soft dollar arrangements so fund shareholders understand the financial relationship with the brokerage firms.