Massachusetts Financial in Talks to Settle Fund Probes
Massachusetts Financial Services Co., one of the nation’s oldest mutual fund companies, is negotiating to settle state and federal investigations of its fund trading practices by paying a penalty in the range of $200 million and lowering its fees, people familiar with the matter said Friday.
If approved under those terms, the deal would mark the second-largest financial penalty by a fund company in the 4-month-old industry scandal. Sources said a settlement could be announced as early as next week.
Alliance Capital Management agreed last month to cut its fees by $350 million and pay $250 million in restitution for its trading practices.
The investigations of MFS by New York Atty. Gen. Eliot Spitzer and the Securities and Exchange Commission center on so-called market timing, in which investors rapidly buy and sell funds in pursuit of quick profits. Their gains often come at the expense of long-term shareholders.
Market timing is not necessarily illegal. But regulators have investigated fund companies that told investors they barred the practice while clandestinely allowing favored investors to engage in it.
MFS, which is owned by Sun Life Financial Inc. of Toronto, acknowledged last month that it did not monitor 11 funds for timing because it did not think the activity was hurting shareholders. It has since barred timing in those funds. An MFS spokesman declined to comment.
The $7.2-trillion U.S. mutual business has come under attack from Spitzer, the SEC and other regulators, who began investigating the industry’s trading and sales practices in September.
Among other reforms, regulators are pushing for better disclosure of the costs borne by fund shareholders.
Seizing on that issue Friday, a group of financial planners released a study labeling expense ratios, the most widely used measure of the ongoing cost of fund ownership, as misleading.
The ratios, which are expressed as an annualized percentage of a fund’s assets, downplay the true cost of running a fund by an average of 43%, the study found. Researchers say that’s because the ratios omit brokerage commissions and the so-called bid-ask spreads on stock transactions, the premiums compensating middlemen.
As an example, the Putnam Voyager fund’s Class A shares carried an expense ratio of 0.88%, but the fund’s total costs equaled 1.67% when trading expenses were included, said the study’s author, Edward O’Neal, an assistant finance professor at the Babcock Graduate School of Management at Wake Forest University in North Carolina.
The study, which looked at the 30 largest domestic stock funds in 2001, was paid for by the Zero Alpha Group, a network of financial advisors that promotes the use of index funds.
Friedman reported from Los Angeles, Hamilton from New York.
