Thursday, June 28, 2007

Mutual Fund Arbitrations - the Next Big Thing?

Mutual funds have almost universally been considered to be the haven of the conservative investor. You invest your money in the fund, presumably with an experienced money manager at the helm, and you watch your money grow. Part of the allure of the funds is that there are no commissions charged, or one commission at the time of the investment.

This of course, is not necessarily true. There are any number of fees that are indirectly charged to the mutual fund investor, through charged by the investment company and the manager to the fund itself - charges that the investor never sees.

Further complicating the issues is that many mutual funds have different classes of shares, an A share, a B share and a C share. Each class of shares are charged different fees and expenses, and are appropriate for different types of investors and different investment objectives. Many investors do not understand the difference, and over the course of time could wind up paying significantly more fees and costs if they are in the wrong class of shares.

While the SEC and Congress address these "hidden" fees, and the problems with the disclosure of those fees, the NASD has been investigating brokerage firms for their conduct in the sales of mutual funds. In particular, the NASD has been focusing on what disclosures are made to the investor regarding the share classes.

The NASD announced today that it has imposed fines against MML Investors Services, NYLIFE Securities, and Securities America, Inc for improper sales of Class B and Class C shares. According to the NASD's press release, which is linked above, the cases involve over 10,000 transactions and over 1,000 households.

Brokers who are selling mutual fund shares should review the funds materials and insure that investors are being placed in the appropriate shares for their investment objectives. Investors need to do the same, and insure that they understand the fees and charges that they are incurring as a result of the particular class of shares in which they invest.
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