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Rating:MFS Joins Fido in Call to End Soft Dollars Not Rated 0.0 Email Routing List Email & Route  Print Print
Tuesday, March 16, 2004

MFS Joins Fido in Call to End Soft Dollars

Reported by Sean Hanna, Editor in Chief

MFS Investment Management is lining up behind Fidelity Investments in calling for brokerages to disclose specifics of what they charge fund firms for trading securities. MFS non-executive Chairman Robert Pozen called for the disclosure the same day it was reported that Fidelity executives sent a letter to the SEC asking for the same thing.

Pozen's call for more detail in the invoices submitted for trades came as MFS executives provided more detail on how they are reforming the fund firm's operations.

The appointment of Pozen at MFS and its reforms are both a response to accusations that the fund firm made arrangements with large investors that allowed them to market time its funds in violations of their prospectus. The fund firm has settled those charges brought by the SEC, New York and Massachusetts without admitting or denying wrongdoing.

Pozen's laid out how he would like brokerages to change their fee disclosure in a series of media interviews and statements on Monday.

"We are asking Wall Street firms to give us an execution-only price," said Pozen, a former vice chairman of Fidelity, told the paper. "We are valuing their research at zero." He added that his "expectation is that other fund firms like Fidelity will also take this position and that commissions will come down."

Pozen also said that MFS would no longer pay soft-dollar commissions to brokerage firms for third-party research and market data.

He also told the Wall Street Journal that with soft dollars "It's all camouflaged." He added that, "If we want something, if we think it's valuable, we will pay cash."

MFS officials estimate the decision to eliminate soft-dollar payments may increase the fund advisors trading costs by $10 million to $15 million annually. However, if other fund firms join it and brokerages respond by cutting commission rates, the trading costs could be reduced industry wide.

Currently institutional trades are priced at about 5 cents per share. It is believed that trading costs could fall to as little as 2 cents per share in a market adopting an unbundled pricing scheme.

The change policy on using soft dollars was one of a number of changes the firm announced. The full list includes:

  • Ban the use of brokerage commissions to acquire third-party research and market data services.

  • Make permanent its current ban on the use of brokerage commissions to recognize fund sales.

  • Increase commission recapture programs to further cut operating expenses paid by shareholders. MFS will build on its current use of commissions to defray custody costs, thereby lowering shareholder costs.

  • Expand the use of 2 percent redemption fees on exchanges and redemptions made within 30 days of purchase, currently applied to its international/global and high yield funds and now to include MFS small and mid-cap funds. Expand the use of redemption fees to all other MFS equity and bond funds, except money market funds, by imposing a redemption fee on all exchanges and redemptions made within five days of purchase.

  • Continue to support the proposed 4:00 p.m. hard closing rule to eliminate any possibility of late trading; however, MFS recognizes that the industry must address a variety of complex issues before the solution can be implemented and pledges to work with clients, service providers and others in the industry to develop viable solutions.

  • Expand oversight of shareholder trading practices to recognize potential excessive trading by significantly increasing monitoring staff, enhancing systems capabilities and enforcing restrictions.

  • Continue to make active use of fair value pricing techniques to produce more current prices on portfolio securities to help prevent trading abuses.

  • Provide full expense disclosure of estimated expenses for each shareholder based on quarter-end holdings.

  • Provide a Web-based individualized expense calculator enabling investors to calculate their actual dollar expenses by inputting their MFS fund holdings.

  • Provide increased disclosure of portfolio turnover and brokerage costs.

  • Expand sales disclosure by providing more prominent disclosure of breakpoints (volume sales discounts) and cash payments by MFS to brokers.

    MFS also said that its independent trustees will appoint an independent compliance officer who will be responsible for assisting the board and all of its committees in monitoring compliance by MFS Funds.

    "These reforms build on the core values of the MFS organization integrity, disciplined management and customer focus and they go beyond any regulatory requirements. MFS is again asserting its historic role as a leader in setting ethical norms for the fund industry," said Pozen. 

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