MFS to pay $50 million fine for inadequate disclosure

First such action in mutual fund scandal

April 01, 2004|By Andrew Countryman | Andrew Countryman,CHICAGO TRIBUNE

In its second multimillion-dollar settlement with federal regulators in two months, Massachusetts Financial Services Co. agreed yesterday to pay $50 million over allegations it failed to tell customers enough about payments it made to brokerages to push its mutual funds.

The Securities and Exchange Commission said the action is the first against a mutual fund manager over inadequate disclosure of these payments.

In February, MFS, one of the nation's oldest mutual fund companies, agreed to pay $225 million and reduce fees by $125 million to settle claims that it allowed improper fund trading, a central issue in the scandal that has engulfed many firms in the $7.6 trillion industry.

Yesterday, the SEC alleged that MFS had deals with about 100 brokers, paying cash or commissions from the funds' trading in exchange for added prominence in the brokerages' sales efforts, known as "shelf-space" arrangements.

MFS, which calls itself the creator of the nation's first mutual fund, did not admit or deny any wrongdoing.

While not illegal, such arrangements are supposed to be fully disclosed to investors.

"A mutual fund manager's use of fund brokerage commissions to pay for the marketing and distribution of the fund creates a conflict of interest that must be fully and fairly disclosed," said SEC enforcement director Stephen Cutler.

MFS said it has stopped using brokerage commissions to fund these deals and said last month that it would no longer pay trading commissions for brokerage research, known as soft-dollar arrangements.

"Our settlement with the SEC reflects our eagerness to put this matter behind us," said Robert Pozen, chairman of Sun Life Financial Inc. subsidiary MFS Investment Management, based in Boston. Massachusetts Financial Services is the investment adviser to the funds. "MFS has taken steps far beyond those required of us to assure shareholders of our commitment to protecting their interests."

MFS also agreed to pay $1 in restitution and to implement various compliance reforms.

The $1 in restitution is more than symbolic: Any such payment triggers a provision of the Sarbanes-Oxley law that allows the $50 million to be returned to MFS funds to benefit fundholders.

Chicago Tribune is a Tribune Publishing newspaper.

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