Proposed SEC forms may be useful for annuities, variable life products

Commission confirmation alerts buyer to broker fees

Your Money

March 14, 2004|By Julie Jason

The Securities and Exchange Commission is proposing to send every purchaser of mutual funds, variable annuities and 529 plans an expanded, two-page confirmation document.

In an unusual move, the SEC is requesting your comments on the usefulness of the new disclosure forms. The proposal and an electronic means of commenting are provided at www.sec.gov. Locate "Investor Information" and click on "Comment on Mutual Fund Rule," then on "Proposed Forms," and find Attachments 1, 2 and 3. These are confirmation forms you would receive after buying the product.

The example in Attachment 1 shows that you paid $8,000 for 422.61 Class A shares of BBB Equity Fund. Your investment is $7,678.82 or $18.17 (net asset value) per share, but what you actually paid was $18.93 a share, which includes a front-end load. Both are shown on the form and defined on the back of the confirmation and in the prospectus.

The next section shows that you paid the front-end sales load of $321.18 and will be charged an asset-based service fee estimated at $19.20 in the first year. Up to now, this information has been obtainable only with the prospectus, a calculator and current prices.

The following is new: Section C contains the "sales fee" of $300, and equals the part of the $321.18 front-end load that the fund pays the brokerage. Although not defined on the form, this is dealer compensation, said Susan Wyderko, SEC's director of investor education.

"Revenue sharing" is $30.72. This is a fee that the brokerage "may receive in connection with your purchase" from the fund's distributor, adviser or an affiliate, not the fund itself.

"Portfolio brokerage commissions" of $15.36 are commissions the brokerage firm also may receive in connection with your purchase. As defined on the back of the confirmation, these are payments a fund makes to a brokerage to buy and sell securities in the fund's portfolio. The SEC believes that this is a potential conflict, there being a greater incentive to sell this fund that pays the broker commissions over another that does not.

Finally, there is "yes" or "no" disclosure about whether the person who made the sale received any special compensation. If the fund has a back-end load, the firm discloses whether the broker received more than he would have if you bought a front-end load fund.

This confirmation is not easily understandable and I doubt it would be useful for a mutual fund purchase, partly because it is delivered after the sale.

However, the disclosure would be extremely valuable for variable annuities and variable life products for two reasons.

First, such purchases can be rescinded during a "free look" period. Second, many of these products are packaged without upfront commissions, leaving uneducated investors to believe mistakenly that compensation for the sale is inconsequential.

The proposed confirmation would disabuse them of that view. Some of a broker's biggest tickets can be variable product sales.

You always want to know how much the broker is getting paid for the sale, especially if there is no upfront commission, so you can assess whether the recommendation is based on the broker's self-interests.

Attorney Julie Jason is a money manager and retirement finance author who writes for The Advocate, Stamford, Conn., a Tribune Publishing newspaper. E-mail her at yourmoney@tribune.com.

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