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Rating:Fund Firms May Have a Role Model at MFS Not Rated 4.0 Email Routing List Email & Route  Print Print
Wednesday, November 19, 2003

Fund Firms May Have a Role Model at MFS

by: Sean Hanna, Editor in Chief

Can fund firms steer clear of this fall's scandals by jumping ahead of the curve? To see if they can you may want to watch MFS. The Boston-based subsidiary of Sun Life Financial Company of Canada appears to have taken a number of steps in recent days that put it ahead of the curve.

Among the changes at the firm that have leaked out in recent days are its decisions to eliminate directed-brokerage commissions and to add redemption fees to all of its international funds. By adding the fees the firm is taking a step beyond the ICI's recent recommendations to thwart market timers. In eliminating the directed-brokerage commissions the firm is also moving its funds out of the line of fire in what may be the next battle launched by industry regulators and investigators.

Meanwhile, the firm is taking a low profile with the changes, declining opportunities to speak to the media about the reasons changes to its policy on directed-commissions. A spokesperson explained that the firm does not comment as a matter of policy on business relationships with partners.

The fund firm's decision to cease making rewarding fund distribution with directed-brokerage was first reported Tuesday in the New York Times. The paper relies on sources at broker-dealers who told it MFS informed them that it had imposed a ninety day moratorium on the practice last week. MFS told the broker-dealer that it is trying to gauge how regulators view the practice.

In the post-Spitzer era, it is very likely that regulators will frown on the practice of fund firms sending trades to broker-dealers in exchange for increase their profile on the B-D platform. From an outsiders' perspective, the practice appears to be a way for firms to use shareholder funds to pay for distribution without providing the same disclosure that is provided in the case of 12b-1 fees and brokers' loads.

Although the arrangements are disclosed in fund prospectii, the actual dollar amount paid by the funds in each case are not disclosed.

MFS has been one of the most popular fund groups with brokers at large distributors such as Merrill Lynch, so the impact of the decision on the firm's distribution may be difficult to determine.

Meanwhile MFS' directors are also taking on market timers. In July the funds' board approved adding redemption fees of 2 percent for shares held fewer than 30 days in each of the MFS international funds. The funds will also limit the number of round trips made annually by larger shareholders.

The moves apparently were made in response to timers attacking MFS funds and not the industry probes. A spokesperson for MFS told the MFWire.com that the redemptions fees are the third line of defense erected by MFS directors. The firm already limited the number of annual roundtrips by shareholders and its uses a fair value pricing model to limit the staleness of the funds' NAVs.

Meanwhile, the Boston Herald noted that four domestic stock funds including, MFS Emerging Growth, MFS Research, Massachusetts Investors Growth and Massachusetts Investors Trust, were among those with the highest turnover last year according to a Lipper Analytics study of funds with more than $500 million in assets. None of those funds would be covered by the new redemptions fees. Nor would they appear to provide arbitrage opportunities to investors. More likely, shareholders are playing momentum strategies using the funds.

Though both Massachusetts' Galvin and New York's Spitzer said that they were investigating the fund industry last May and Spitzer began subpoenaing select firms in July, the nature of the probes was not fully revealed until September. 

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