Making sure that mutual fund salespeople put their customers' interests first


August 25, 1991|By WERNER RENBERG | WERNER RENBERG,1991, Werner Renberg

There are plenty of well-managed, no-load stock and bond mutual funds whose shares you can buy directly from fund companies after doing your own research. But you also can buy front- or back-end load funds from a broker, insurance agent or other salesperson who can offer advice and other services.

If you accept a front-end load that reduces the amount of money working for you, a back-end load that reduces your proceeds when you sell, or annual charges that shave your dividends, you ought to be treated fairly.

To help ensure that, the mutual fund business is heavily regulated by the Securities and Exchange Commission, state securities agencies, and the National Association of Securities Dealers, a self-regulatory organization operating under the SEC's oversight.

Salespeople who sell fund shares (or other securities) to you have to register with the NASD -- hence the term "registered representative," or RR -- and their employers have to register with the SEC. Of some 400,000 RR's, about one-half are insurance agents, the NASD reports. The others are brokers and other professionals.

Perhaps no aspect of the mutual fund business is more difficult for regulators or employers to monitor than the relations -- especially verbal communications -- between investors and the people who sell fund shares.

To reinforce efforts to protect both fund investors and the fund industry against wrongdoing by RR's, the Investment Company Institute has produced "The Do & Don't Handbook For Registered Representatives Who Sell Mutual Funds." It's designed to alert registered representatives to the requirements associated with offering mutual fund shares to the public.

The following 10 points, taken from the handbook, will remind you of your rights when dealing with your RR.

1. Suitability: An RR's recommendations to you must be suitable. "One determination of suitability is the match between the fundamental investment objectives of a particular mutual fund and the customer's own objectives and goals," the ICI notes.

2. Prospectus: The confirmation of a sale of mutual fund shares must be preceded or accompanied by a prospectus. (To help

you to understand this important document, you

can get a free copy of "An Investor's Guide to Reading the Mutual Fund Prospectus" from the ICI, 1600 M Street N.W., Suite 600, Washington, D.C. 20036.)

3. Breakpoint sales: Front-end loads typically are reduced with a large purchase. The point at which a load drops -- say, $25,000 or $50,000 -- is called a breakpoint. An RR may not sell you shares whose cost is just below a breakpoint without advising you.

TH 4. Selling dividends: An RR may not "sell dividends" -- that is, sug

gest you buy shares just before a fund declares a dividend. Such purchases, which generate taxable income, may be ill-advised.

5. Your interest: "The customer's interest must come first," the ICI says. An RR "may not favor or disfavor" the sale of shares of particular mutual funds or fund groups because of brokerage commissions or any form of extra compensation received or expected. (For selling shares of an employer's fund, an RR may get a higher commission. One example of a non-cash incentive: a free trip to London.)

6. Costs: You may be confused about how much of the money being invested is actually put to work after a load is deducted. A registered representative should make certain that you understand.

7. No-loads that aren't: A fund sold with a contingent deferred sales load (back-end load) may not be referred to as a no-load fund. When offering shares of such funds, an RR has to explain that early redemptions would trigger a fee.

8. "Churning": Executing excessive trades in your account for the primary purpose of generating commissions is prohibited by NASD's Rules of Fair Practice.

9. False or misleading statements: RR's have a responsibility to accurately inform you about funds they are offering. It is not proper, for example, to represent a fund, such as a government bond fund, as "safe" or "guaranteed." (It's the securities owned by the fund that may be guaranteed -- not the shares issued by the fund.)

10. Apples and oranges: When comparing funds with alternative investments or savings vehicles, RR's must be sure that comparisons are fair and balanced. Differences, such as in guarantees and fluctuations of principal and/or return, should be explained.

And remember, a purchase is only the beginning. Once you're in a fund, you need to check occasionally that it's still appropriate for your investment goals. Your registered representative, presumably staying on top of it, should be able to help you with this, too.

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