Week in Review
May 14, 2007
A.G. Edwards Settles With SEC on Oversight Charges
A.G. Edwards will pay the Securities and Exchange Commission $3.86 million to settle charges that it failed to supervise brokers who used deceptive means to engage in mutual fund market timing. The fine includes a civil penalty of $1.5 million and $2.36 million in disgorgement and interest.
The firm also agreed to hire an independent consultant to review whether the changes it has made to its policies and procedures should prevent and detect future market-timing activity.
Although the Commission has settled with one former A.G. Edwards broker, Charles Sacco, it has opened proceedings against another one of the firm's brokers and two branch managers, Thomas Bridge, James Edge and Jeffrey Robles.
The SEC said that brokers in several of A.G. Edwards' offices engaged in market timing between January 2001 and September 2003.
Merri Jo Gillette, director of the SEC's Chicago regional office, said: "By failing to develop or adopt reasonable policies to prevent its registered representatives' misconduct, A.G. Edwards ignored its responsibility to reasonably supervise its registered representatives."
Investors Pressuring Hedge Funds to Lower Fees
Typically delivering high double-digit returns, hedge funds have had no trouble charging investors hefty fees, typically, 2-and-20: 2% of assets and 20% of gains. But with performance disappointing of late, some investors are pressuring hedge funds to lower their fees, BusinessWeek reports.
Last year, the average hedge fund returned 12.9%, whereas the S&P 500 rose 15.1%.
Meanwhile, wealthy investors' interest in hedge funds is on the decline; 27% of households worth more than $25 million own hedge funds, down from 38% two years ago, according to Spectrem Group.
"We have no problem paying high performance fees for a manager's selection, but we find taking on average market risk inherently unsatisfying," said Russell Read, chief investment officer of CalPERS.
Robert Discolo, head of hedge fund securities at AIG Global Investment Group, agreed: "In most cases, [managers] don't deliver enough to justify their fees. Most funds are doing things that can be replicated much cheaper."
As a result, institutional investors with large stakes in hedge funds are pressuring the managers to lower fees. At the same time, some hedge funds are voluntarily rewarding investors who agree to lock up their money for three years, rather than the standard one year, with a 1.5-and-15 rate, that is, 1.5% of assets and 15% of gains.
Independent Directors Issue 12b-1 Fee Guidance
The Mutual Fund Directors Forum, a group of independent directors, issued guidelines on what boards of directors should consider when reviewing 12b-1 fees. The group agreed with the Securities and Exchange Commission, which recently vowed to review the fees, that the industry has changed considerably since the time when the fees were first instituted.
Specifically, the forum calls on directors to analyze how their funds are distributed and whether use of fund assets to pay for distribution may benefit shareholders by providing greater stability of fund assets and by attracting more assets. They should look at the total distribution budget and how, if they are used, 12b-1 fees fit into that. In addition, directors should consider extending distribution of their firm's funds through additional distribution channels and analyze whether their firm's distribution costs are competitive with those of other companies.
"All directors are focused on taking all necessary steps to ensure that the best interests of their shareholders are being represented when fund assets are used to pay for distribution of shares," said Susan Ferris Wyderko, executive director of the Forum. "But as we state in our best practices, it is clear that Rule 12b-1, as it is currently structured, simply does not reflect the current marketplace and cries out for serious review and significant reform."
When they were first introduced in the 1980s, 12b-1 fees were meant for marketing to help a fund grow assets. Today, however, they are used as an alternative to front-end loads to compensate brokers or, sometimes, for fund administration and shareholder services.
FBI: Fraudsters Scamming Online Brokerage Accounts
The Federal Bureau of Investigation is warning that tens of millions of dollars have been robbed from online brokerage accounts by scammers who target hotel guests and Internet cafe patrons, Bloomberg reports.
A number of affected brokerages have reimbursed their customers for their losses, although not all brokerages have policies requiring that they do so. E*Trade Financial paid $18 million in last year's third quarter to reimburse customers whose accounts were scammed, while TD Ameritrade paid $4 million.
In March, the Justice Department opened its first criminal charges in such cases. Since December, the Securities and Exchange Commission has brought five civil complaints against such scammers. Several more cases are in the pipeline, according to an SEC official.