FAILURE TO DISCLOSE FINANCIAL INCENTIVES FOR PREFERRED FAMILY MUTUAL FUNDS IS FRAUD!!!
by Lawrence C. Melton, Esq., firstname.lastname@example.org
THE HAYES LAW FIRM, www.dhayeslaw.com, 1-866-332-3567 toll free
A brokerage firm may decide to select a particular group of mutual fund families it wishes to push and recommend to its customers. These are typically called "preferred family mutual funds." The firms motivation for pushing these funds is financial. As payment for the promotion, the preferred family mutual funds will make revenue-sharing payments to the brokerage firm. This is legal as long as it is disclosed to the individual investors. If the brokerage firm does not adequately disclose this revenue-sharing arrangement to its customers, the brokerage firm will be accused of fraud.
All too often the broker will fail to disclose his incentive for investing in preferred family mutual funds, namely that they receive what amounts to a "kickback". “The duty of fair disclosure applies to the broker’s commissions and other compensation where the nondisclosure may be material to the customer’s decision to purchase the security the broker has recommended.” NASD Enforcement v. Josephthal & Co., Inc., 2001 WL 1886873 (May 15, 2001). The failure to disclose such incentives harms the customer.
Some mutual-fund companies that run retirement plans take a portion of the money they collect from investors and use it to pay consultants. The consultants, in turn, recommend which funds are included in a retirement plan. Some consultants recommend only those fund companies that make such payments. That is why these deals are called "pay-to-play arrangements". The arrangement is basically a kickback.
The customer has a right to know whether his registered representative is recommending a security based upon the registered representative’s own financial interest rather that the investment value of the recommended security. Misrepresenting or omitting to disclose a broker’s financial or economic incentive in connection with a stock recommendation constitutes a violation of the antifraud provisions. Indeed, “the SEC has established, through its enforcement actions, the principle that charging undisclosed excessive commissions constitutes fraud.” Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, 835 F.2d 1031, 1033 (3d Cir. 1987).
Moreover, the Employee Retirement Income Security Act (ERISA) requires that 401(K) fees be reasonable, fully disclosed, and incurred solely for the benefit of plan participants. The industry is generally not following this rule.
To give an example, about two months ago, Reuters reported that Edward Jones has agreed to pay $75 million to settle charges related to its preferred mutual fund family program. Specifically, the SEC said Edward Jones did not adequately disclose its financial incentives to sell mutual funds from the preferred families of mutual funds. (Karey Wutkowski, Edward Jones to pay $75 million in SEC settlement, Reuters, July 13, 2007). https://www.reuters.com/articlePrint?articleID=USN1327980920070713
Debra Hayes of The Hayes Law Firm made the following comments about Edward Jones: "Edward Jones is in the middle of a class action settlement for taking kickbacks from the mutual funds. When you walked into Edward Jones, there were eight mutual funds and every single client I've ever had has had one of those same eight mutual funds. Well, that's because Edward Jones was getting kickbacks on those mutual funds." See Interview with Debra Hayes Part II, ABOUT BROKER FRAUD BLOG, June 15, 2007.
The Hayes Law Firm is an experienced and efficient plaintiff's firm that specializes in securities arbitration and securities litigation all across the country. Pleas visit our web page at: www.dhayeslaw.com. Our toll free phone number is 1-866-332-3567.