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NASD Vigilance Withers B Share Sales


The increased prevalence of mutual fund B shares has run headlong into a recent NASD crackdown on inappropriate sales of the share class by brokers. With broker/dealers battening down the hatches and B share flows drying up, many of the firms that have recently launched B shares find themselves in a quandary.

"B shares have tanked totally because of the bad press," said Jill McGruder, president and CEO of Touchstone Securities, Inc., whose firm introduced a B share class earlier this year. "The wirehouses were doing the bulk of the B share business and Prudential and a couple of the firms got their hands slapped so they're being really careful."

Slow B share sales have been disappointing, she said. "We haven't seen the pop in overall sales that we would have hoped for."

Nevertheless, McGruder was reluctant to draw any conclusions about the fate of the new share class for her firm. "Its too early. I still think there are firms that will pick up B shares," she said.

Net flow numbers segregated by share class show a dramatic drop-off in B shares. For the first half of last year, flows of B shares totaled $21.7 billion, amounting to 14% of total flows for all share classes, according to data from Financial Research Corporation. This year, flows have reached only $1.7 billion, less than 2% of total flows. B shares constitute just over 10% of the $4 trillion-plus of mutual fund assets tracked by FRC.

Historically, yearly net flows for B shares peaked in 1998 at $33.5 billion, constituting nearly a quarter of total flows. That figure dipped to $21.5 billion in 1999, the same year that front-loaded share flows were negative $5.2 billion. In 2000, B shares shot back up to $31 billion in net flows.