SEC Investigating Soft-Dollar Practices at Mutual Fund Brokers

WASHINGTON — The Securities and Exchange Commission has about a dozen investigations pending of mutual funds and investment advisors who may have improperly pocketed rebates from the brokerage firms handling their trades, a top SEC official said Friday.

“We’ve been finding an increase in the number of violations as well as the egregiousness of the violations,” said Carmen Lawrence, the SEC’s New York regional director. “While it’s not a new area of focus, there seems to be an increase in abusive activity in last couple of years.”

At issue are so-called soft-dollar arrangements between mutual funds and brokers who handle the lucrative business of trading for the funds. Mutual funds pay brokers for such services, but Wall Street firms also compete for the business by offering free services to the funds in the form of rebates, ranging from stock research to free custodial services for stocks.

Fund companies are allowed to receive rebates as long as they are reinvested on behalf of the funds; are used for securities research; or are used in other ways that benefit fund investors. Securities firms use this form of payment to try to win a portion of the increasingly popular $3.3-trillion mutual fund business.

The SEC recently required mutual funds to disclose such arrangements to their shareholders in order to lessen the apparent conflicts of interest.

Lawrence said it’s “impermissible use such arrangements to pay for rent, utilities and overhead expenses.”