Mutual Funds

Seven Mutual Fund Horror Stories for Investors!

Published on: August 12, 2008 | by Shepherd Smith Edwards & Kantas, LLP

A recent Morningstar article outlines seven mutual fund horror stories. In addition to the Legg Mason Value Fund (symbol LMVTX) and Schwab YieldPlus Fund (symbol SWYPX) and the Regions Morgan Keegan funds, which are the subject of stories we have reported recently, several other hard-hit mutual funds are discussed.

For example, the Eaton Vance Greater India fund (symbol ETGIX) has lost over 44%! The article, found in the Morningstar Fund Investor’s “Annual Guide on Where Not to Invest”, reminds investors to be especially wary of international funds, particularly those focusing on securities issued in China and India.

Also mentioned in the report is the Kinetics Market Opportunities fund (symbol KMKNX) which has lost over 30% this year. While this same fund gained 34% the previous year, its very narrow focus made it particularly susceptible to volatility. Large holdings of NASDAQ, CME, NYSE, and Legg Mason caused the fund to plummet.

Mutual Funds Misrepresented as Safe: SSgA Yield Plus, Fidelity Ultra-Short Bond (FUSFX) & Regions Morgan Keegan Select High Income (MKHIX)

Published on: August 11, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Just as auction rate securities were sold by most investment firms as safe alternatives to money market funds which paid a higher rate, so also were a number of mutual funds. Packaged and sold as ultra-short term bond funds and a safe haven for funds which were to be secure and assessable, many of these funds were really invested into high-risk and or potentially far from liquid assets.

Three of these funds are the SSgA Yield Plus fund, which was liquidated in June, the Fidelity Ultra-Short Bond (symbol: FUSFX), and Regions Morgan Keegan Select High Income (symbol MKHIX). All three, it has been learned, were actually actually “junk bond” funds. As problems in the credit markets surfaced over the past year, these funds have lost up to 80% of their value

The portfolios of these funds had structured debt instruments tied to subprime mortgages and other assets that do not trade frequently. This prevented the volatility of the assets from being properly reflected, consequently masking the risks of investing into the funds. The recent changes in the values have greatly altered the risk parameters, but too late for those invested in the funds who have sustained significant losses.

Merrill Lynch, Prudential Securities, Pruco and UBS Must pay $2.4 Million in Fines for Mutual Fund Abuses

Published on: February 28, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) announced today that five major brokerage firms have agreed to pay fines totaling $2.4 million for supervision violations and improper mutual fund sales to thousands of investors. These firms must take remedial steps to prevent such actions in the future and pay amounts estimated to exceed $25 million to their clients because of such practices.

According to FINRA, the violations include sales by these firms of load securities, meaning clients were required to pay commissions, when these investors were eligible to make fund exchanges without paying commissions. FINRA’s press release states that “Class B and Class C mutual fund shares and failure to have supervisory systems designed to provide all eligible investors with the opportunity to purchase Class A mutual fund shares at net asset value (NAV) through NAV transfer programs.”

Prudential Securities must pay an $800,000 fine, UBS Financial Services, Inc. was fined $750,000 and Pruco Securities was hit for $100,000 for improper sales of Class B and Class C mutual fund shares. These firms also agreed to remediation plans that will address over 27,000 fund transactions in the accounts of 5,300 households. Merrill Lynch, Prudential Securities, UBS and Wells Fargo must take steps regarding customers who qualified for but did not receive the benefit of NAV transfer programs. It is estimated that total remediation to fhese firms’ customers will exceed $25 million.

Investors Complain about Mutual Funds Sold by Morgan Keegan

Published on: January 12, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Some Investors have complained they were sold mutual funds by the securities firm of Morgan Keegan & Company, Inc. based on representations of safety which were unfounded. At this time such complaints are only allegations and no determination has been made that the firm and/or its representations engaged in any wrongdoing.

The funds in question include RMK High Income Fund (RMH), RMK Advantage Income Fund (RMA), and RMK Multi-Sector High Income Fund (RHY). Reportedly, these funds were heavily invested into collateralized debt obligations (CDO’s) based on sub-prime mortgages and have therefore declined sharply in value.

Morgan Keegan is a Memphis, Tenessee based brokerage firm and is a division of Regions Financial Group. The firm’s offices are located primarily in the South, including in the states of Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee and Virginia.

SEC Investment Management Division Director Wants Mutual Funds to Call Their “Distribution Fee” a “Sales Charge”

Published on: December 28, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The director of the Securities and Exchange Commission’s Investment Management Division is calling for mutual funds to rename their 75 basis point “distribution fee” and call it a “sales charge”-regardless of whether the sales charge is deducted right away or over a period of time.

At the Investment Company Institute’s 2007 Securities Law Developments Conference in Washington, Donohue issued a call out for “truth in labeling.” He said that financial advisers should notify investors about the sales charge and the information about the charge should also be in the prospectus and the confirmation.

Last year, the mutual fund industry collected 12b-1 fees totally $11.8 billion. These fees are authorized under the 1940 Investment Company Act Rule 12b-1 in 1980.

American Funds’ Europacific Growth Fund, Allegiant Advantage Fund, and Vanguard 500 Index Fund Are Among Mutual Funds Offering Data to Investors Via SEC’s EDGAR

Published on: September 3, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission says that a number of mutual funds have started providing risk/return data with the use of interactive reporting language.

Vanguard 500 Index Fund, Allegiant Advantage Fund, Muhlenkamp Fund, and American Funds’ Europacific Growth Fund are among the mutual funds that have taken what the SEC is calling this “significant step.”

The agency says that it will continue to observe the way information can be used to keep mutual fund investors informed. It will also look at whether anything else needs to be done to create greater accessibility for investors.

Industry Group Wants to “Reform” – Not End – Abuse Prone B-Shares

Published on: July 26, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Independent Directors Council (IDC) recently provided the Securities and Exchange Commission with a list of “reforms” regarding 12b-1 mutual funds, including that mutual fund directors should oversee the fees. The group claims that the fees are used to pay for advice and shareholder servicing, when the true use is to pay high comissions that can be hidden or obfuscated from investors.

In 2006, the mutual fund industry collected $11.8 billion in 12b-1 fees. The SEC sponsored a roundtable discussion on B-shares in June to discuss whether to do away with such shares. Seeking compromise, The IDC now suggests “clarification” of 12b-1 plans, improved disclosures to investors and send-it-to-committee type delay tactics – all intended to avoid the proposed end to the issuance of such shares.

Three decades ago Wall Street sought to compete with “no-load” mutual funds being sold directly by mutual fund companies. In 1980, it got help from Washington to create “B shares,” so-called because these are authorized under section 12-b of the Investment Advisors Act. While no front end load is paid to buy such shares, sellers are paid up front to sell the shares. Buyers are then charged fees each year for 5 years and, if they try to get our earlier, are charged a penalty for early withdrawal.

Edward Jones Must Pay $75 Million For Failing to Disclose Mutual Fund Incentives

Published on: July 19, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Edward D. Jones & Co. will pay $75 million to settle charges by the Securities and Exchange Commission that it failed to adequately disclose financial incentives to sell mutual funds from its Preferred Families of mutual funds.

The SEC also said that Edward Jones did not make adequate disclosures on its website about its revenue sharing, its directed brokerage payments and other payments for distribution of mutual fund shares. The firm was also accused of failing to disclose information about college savings (or “529”) plans it sold.

Edward Jones agreed to pay $37.5 million in civil penalties, as well as $37.5 million in disgorgement, and to alter its website disclosures about the preferred mutual fund family program and the college savings plan, but neither admitted or denied the claims against it.

SEC Fines of Invesco and AIM Advisors to Fund $375 Million in Payments to Victims of Late Trading Fraud in Mutual Funds

Published on: July 18, 2007 | by Shepherd Smith Edwards & Kantas, LLP

After a widespread investigation into late-trading of mutual funds the SEC levied sanctions against various mutual fund management companies and others, including fines as well as orders to disgorge profits and to reimburse the victims of the fraudulent trading. In 2004, Invesco was ordered to pay $325 million and AIM Advisors was ordered to pay $50 million.

The basis of the fraud was simple: Closing prices of mutual fund shares are set based on closing prices of the shares held in the funds. However, inflow and outflow of funds can legitimately occur based on orders placed prior to the close. The fraudulent orders were placed after the market closed but were made to appear as earlier orders. Those transacting the late orders had the unfair advantage of news announced after the close as well as post-closing changes in stock prices.

Over several years, billions were reaped from such improper market timing activities. The victims of the fraud were the millions of legitimate owners of the mutual funds. The SEC has established what it calls “Fair Funds” to reimburse victims of late trading and other scams. This week over $300 million will be also distributed to Time Warner shareholders who bought based on improper financial data. The SEC says that, with these distributions, the total paid from Fair Funds now tops $2 billion.

Securities America Fined $375,000 Over Secret Commissions Directed to Its Broker

Published on: July 18, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Securities America, Inc. agreed to a $375,000 fine to settle charges by the NASD that it received improperly directed mutual fund commissions on behalf of one of its brokers, failed to supervise and failed to disclose the arrangements to the affected mutual fund owners.

The NASD said that this situation, in which a mutual fund company directed brokerage fees specifically for the benefit of a lone broker, is the first known case of its kind. NASD rules prohibit registered firms from allowing sales personnel to participate in directed brokerage arrangements. NASD fair dealing regulations also require disclosure to clients of such fees and other compensation received through arrangements involving their accounts.

A directed brokerage arrangement is one in which a client, such as a pension fund, directs a planner to use a certain broker-dealer for trade executions. In return for the commissions received on the transactions, the broker-dealer provides other services to the advisor or these can be rebated to the clients. The Securities America broker arranged for such commissions from union-sponsored retirement plan clients to be directed to his firm for his own benefit.