Thursday, January 6, 2005

Tracing the Rebate Checks from Brokers

An article in the Wall Street Journal (Jan. 6) discusses a new phase in the SEC's ongoing investigation of conflicts of interest in the capital markets.  According to the article:

The Securities and Exchange Commission has launched a broad examination of whether managers of big mutual funds and hedge funds are pocketing rebates on stock-trading commissions that should be directed back to investors, people familiar with the matter say.

The investigation goes beyond so-called "soft dollar" arrangements under which a broker will provide benefits--such as stock research--for free in exchange for the hedge fund or mutual fund placing its trades through the firm.  While questionable, soft dollar transactions ostensibly provide a benefit to the investors because the fund otherwise would have to pay for what the broker is providing.  In the case of research, the question is whether it is any good, but that's another issue. This investigation is similar to the SEC's review of brokerage firms who accepted payments from mutual funds to push those funds to investors without disclosing the payments; Edward D. Jones & Co. recently settled such a case and paid $75 into a settlement fund to compensate investors steered into the funds (see Edward D. Jones & Co. SEC Settlement).

The SEC's investigation is part of a new approach taken by the Division of Enforcement to look at broader industry practices rather than simply responding to a particular violation or company disclosure.  Whether the investigation will result in any enforcement actions is not known at this time, but whenever there is "free money" available, there is bound to be an abuse. (ph)

Civil Enforcement, Securities | Permalink

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