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Week In Review


FINRA Eyes Action Against Firms Selling Municipal Bonds

The Financial Industry Regulatory Authority is preparing to take enforcement action against certain firms for selling municipal bonds to retail customers without disclosing material information, including that the bonds' credit ratings had been spiraling downward.

Speaking on a municipal securities panel at the Securities Industry and Financial Markets Association's Compliance and Legal Seminar, Malcolm Northam, FINRA's director of fixed income, said the agency also will take a series of enforcement actions this year against firms for excessive markups and markdowns of municipal securities.

In other action, FINRA is conducting inquiries of muni bond underwriters' relationships with swap providers and investment advisors tapped to serve state and local municipal bond issuers and investment pools or pension funds, he said.

But, generally, a big area of focus in the municipal market for FINRA during 2010 will be dealer interactions with retail customers, Northam said. "The key words for 2010 are retail, retail, retail," he said. One area that FINRA plans to focus on is retail order periods, which increasingly are being included in sales of new muni bond issues, he said. FINRA plans to look at issuers' requests for retail order periods, how the underwriters are complying with those requests, as well as how issuers and underwriters are defining retail.

If issuers are asking underwriters to set aside a certain amount of bonds for retail customers, "I should darn well be able to see retail trades going on," Northam said.

Roth IRA Conversions Surge

New rules and technology, trends among Baby Boomers and the Great Recession have led to a burst in Roth individual retirement account conversions.

At Bank of America, conversions to Roth IRAs in the first quarter spiked to about 15,000 from 3,600 a year earlier, and handily topped 2009's total of 8,000. Tax law changes involving income thresholds resulted in roughly 13 million U.S. households becoming newly eligible for conversion to Roths from traditional IRAs or 401(k)s.

The recession also played a significant role in the mass conversion. "Many people, unfortunately, experienced a depreciation in assets, both personal and retirement, and with the tax law kicking in, many people decided that it made sense with their assets at a lower threshold to pay for the conversion now," said Chuck Toth, director of product management for personal retirement at Bank of America Merrill Lynch.

The influx of Baby Boomers was also influential. "They are becoming more focused on retirement and what that means for them from a planning perspective," Toth said.

It was the same story at Fidelity Investments, a leading provider of IRAs, which said conversions to Roth IRAs during the first quarter increased dramatically. Fidelity also credited its jump to the assistance of trained financial representatives and the availability of extensive online content and tools.

The number of investors seeking guidance from Fidelity on Roth IRA conversions hit a record in the quarter.

Keep Derivatives: McNabb

As the Securities and Exchange Commission moves quickly to impose new regulations on derivatives in mutual and exchange-traded funds, regulators should realize that derivatives have become an important tool, said F. William McNabb II, president and chief executive officer of Vanguard Group. Portfolio managers and transfer agents rely on derivatives to provide diversification, fund redemptions and value holdings, according to McNabb and State Street Global Advisors Senior Managing Director James Ross.

Just because a fund employs derivatives, it does not necessarily mean the fund is leveraging, McNabb said. And not all derivatives are created equal, Ross added.

T. Rowe Price in Push for Advisers, Overseas Market

T. Rowe Price is fast gaining new market share as banks and other intermediaries move to a fees-and-advice model, and as the mutual fund company makes a concentrated push overseas to rebuild assets under management.

"The growth of advice has been awesome, and you couple that with the Boomer retirement wave," said George Riedel, head of intermediary distribution within T. Rowe's third-party distribution division. "I have to say, it's been a boon."

Assets under management have been on the rise following the market crash. By the end of 2008, assets had fallen to $276 billion from $400 billion a year earlier, despite clients largely leaving their money with the firm. Assets then grew 42% in 2009, to $391.3 billion, and at March 31, they stood at $419 billion.

NY A.G. Cuomo Sues Ivy For Lying About Madoff

New York Attorney General Andrew M. Cuomo filed a lawsuit Tuesday against the hedge fund division of Ivy Asset Management, a Bank of New York Mellon company, and two of its executives, alleging they deliberately mislead clients about investments tied to Bernard L. Madoff.