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Week in Review


Securities America Fined For Directed Brokerage

The NASD has fined Securities America $375,000 for improperly sharing $280,000 in directed-brokerage commissions, plus other payments, with former broker Michael Bullock, a 16-year veteran of the firm who worked in the Los Angeles area. The NASD also said that Securities America failed to properly supervise Bullock to ensure that he disclose his directed-brokerage commissions to his union-sponsored retirement plan clients.

The NASD also separately charged Bullock for accepting those payments and not revealing them.

"NASD will vigorously challenge all conduct that impermissibly compromises a broker's objectivity, especially when retirement money is at stake," said James S. Shorris, NASD executive vice president and head of enforcement. "In this case, Securities America approved Bullock's improper arrangement to receive directed-brokerage commissions from mutual fund company portfolio transactions while advising his retirement plan clients to invest in this same mutual fund company's securities. This violation of NASD's rules governing mutual fund compensation, when coupled with the failure to disclose to the firm's clients the terms of his financial arrangement, made for an intolerable situation."

The NASD said this is the first time a fund company directed brokerage specifically for the benefit of an individual broker, rather than to obtain overall shelf space at a brokerage firm.

Mass. Probes Banks Over Sales of Complex Funds

Massachusetts Secretary of the Commonweath William Galvin is investigating Bank of America, Morgan Stanley, Citigroup and a number of other broker/dealers over sales of complex investments, particularly structured products and annuities, Reuters reports.

Products such as equity-indexed annuities are frequently expensive and carry penalties for early withdrawals.

"We are looking at this matter to put more attention on the rising popularity of these instruments because they are far more complex than buying a stock, and we want to be sure that customers are informed about the potential risks," said Brian McNiff, Galvin's spokesman.

401(k)s Plans Increasingly Turn to Collective Trusts

Attracted to the low costs of collective trusts, as well as the ability for investors to trade them daily at a time when many mutual funds are imposing short-term trading restrictions due to Rule 22c-2, 401(k) plans are increasingly turning to these alternatives, according to a white paper from AST Capital Trust.

Collective trusts can charge lower fees than mutual funds since they are expressly designed for 401(k) plans and do not have to meet the costs of servicing retail clients.

"It is no surprise that the popularity of collective funds has grown over the past few years," said Steve Ferber, executive vice president of collective fund services at AST Capital Trust.

"Institutional funds, like collective trusts and separate accounts, are increasingly popular with mid- and large-sized employers, as they are significantly less expensive than mutual funds," concurred Pamela Hess, director of retirement research at Hewitt Associates. "A seemingly small number of basis points saved over time can lead to meaningful differences in participant savings."

SEC Grants XShares Relief on Investment Cap

XShares Advisors has obtained regulatory relief from the Securities and Exchange Commission on the amount mutual funds can invest in its HealthShares family of exchange-traded funds.

SEC regulations prevent an investment firm from investing more than 5% of its total assets in a single investment company or 3% of its total outstanding voting securities in another investment company. The regulations also prevent an investment company from investing more than 10% of its total assets in two or more investment companies.

"The HealthShares ETFs, a series of 20 exchange-traded funds, will be the first in XShares' families of ETFs to be exempt from the investing limit set by Section 12(d)1," said Jeffrey L. Feldman, founder and chairman of XShares Group. "The relief will allow mutual funds greater flexibility in investing in HealthShares necessary to achieve their asset allocation and investment strategies."

Microsoft, R.R. Donnelley Working on XBRL Tagging

R.R. Donnelley and Microsoft have partnered to help mutual fund companies submit financial data in extensible business reporting language. R.R. Donnelley has been involved in the XBRL project since its inception and filed the first-ever mutual fund filing in May 2006, for Allegiant Funds.

Under the arrangement with Microsoft, R.R. Donnelley will provide a full-service XBRL solution to any mutual fund company interested in the Securities and Exchange Commission's pilot program, electronically tagging fund companies' financial statements using a mapping engine from Microsoft.

"We are delighted to offer this innovative solution to our mutual fund clients," said Eric Johnson, senior vice president of R.R. Donnelley Global Investment Markets. "We believe a full-service approach to new technologies like XBRL will ease the transition for our clients. Working with a technology leader like Microsoft gives us the ability to stay at the forefront of the latest changes in financial reporting."

Hedge Funds Up 5.25% In 2Q07: Morningstar