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NASD Keeps Close Eye On Mutual Fund B Shares


The National Association of Securities Dealers continues its slow battle against the sale of costly class B shares of mutual funds - one that began two years ago.

Late last month, the regulator fined New York broker McLaughlin, Piven, Vogel Securities and its chairman for inappropriate sales of class B shares and supervisory violations, making it one of several companies fined in the last couple of years for bad B share sales. It also issued an advisory to investors on its Web site warning them about the expenses related to purchasing the shares.

The alert, Class B Mutual Fund Shares: Do They Make the Grade?, includes an expense analyzer that allows investors to calculate and compare the different expenses for A, B and C shares. But it may do less to educate investors than to warn brokers and advisers that they will be held accountable for their sales of B shares, observers said.

"Longer term, it's putting the brokers and advisers on notice that they will have to justify the utilization of a B share," said Harold Evensky, a certified financial planner with the Evensky Group in Coral Gables, Fla. "The ultimate issue would be the event of an arbitration hearing."

As a percentage of all load fund assets, assets in A shares far outstrip those in B shares or C shares, according to Morningstar data. A ballpark estimate put assets in A shares at $1.2 trillion, assets in B shares at $331 billion and assets in C shares at $142 billion. Fund families with the greatest number of B shares include Eaton Vance Group, Nations Funds, MFS Family of Funds and Scudder, according to Morningstar.

The wide gulf between A share assets and B and C share assets may be partly due to the fact that A shares have been around since the 1920s, while B and C shares emerged in the last few decades, said Larry P. Ginsburg, a certified financial planner with Associated Planners Investment Advisory in Oakland, Ca.

For now, Evensky said that clients who switch to his practice from other independent planners and wirehouses own a lot more B shares than A shares. "It's relatively rare to see people selling A shares these days. I would guess that the volume of B shares is pretty good," he said. Also an advocate for fee-only planning, Evensky said that B shares are particularly attractive to commission-based brokers and planners, because they allow the broker to collect a fee while selling something that appears to be no-load.

Ginsburg said he thinks greater scrutiny will reduce B shares sales as a percentage of total load fund sales, but he would also like to see the NASD do more.

Because of breakpoint rules, A shares are almost always a better bet than B shares if an investor has at least $25,000 to $50,000 to invest. That's because the annual 12b-1 fees are much lower on A shares, while the initial commission of up to 5.75% on A shares begins to fall when breakpoint levels are met.

While B shares don't require any upfront commission, investors are charged a back-end commission if they withdraw their money in the first six years, and breakpoints don't apply. After a certain number of years, their 1% 12b-1 fees decline. The only time B shares are really the best option is when an investor has a small amount of money to invest over a long period of time, planners said. C shares don't pay an upfront commission or a back-end commission, but they have a constant 1% annual 12b-1 fee.

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