SEC Probes Brokers’ Practices in Mutual Fund Sales

The Securities and Exchange Commission is investigating how brokers are paid to sell mutual funds to individual investors and whether buyers are informed of the fees their brokers receive, people familiar with the matter said Wednesday.

The investigation focuses on whether brokers receive higher compensation by selling some funds over others, influencing their advice to investors, the people said. The agency also is examining undisclosed fees or other payments that brokers may receive for selling their own firm’s mutual funds, they said.

“It’s a concern that a firm might be out peddling a product where its representatives and its salespeople make more money versus a comparable product they could be selling,” SEC Enforcement Director Stephen Cutler said this week.

The investigation, reported Wednesday by CNBC, comes after Citigroup Inc. and nine other Wall Street firms paid $1.4 billion to settle conflict-of-interest charges by the SEC and other securities regulators. The firms were accused of publishing biased stock research that misled investors to win investment-banking assignments from the companies selling the stock.

SEC spokesman John Heine declined to comment.

Pressure has been building on Capitol Hill for the SEC to look into mutual fund practices.

Last month, Rep. Richard H. Baker (R-La.), chairman of the House’s capital markets subcommittee, pressed the agency to examine whether mutual fund companies are overcharging investors and adequately disclosing their fees.

“I am troubled that there may be insufficient transparency of mutual fund fees, costs and operations,” Baker wrote in a March 26 letter to SEC Chairman William Donaldson. “I am also concerned about mutual fund governance and the performance of fund directors, fund distribution practices and other matters.”