One More Fund Scandal?

Is Paying for Shelf Space a Fraud? Another SEC Investigation Into the Mutual Fund Industry

By Mark J. Astarita, Esq.


While the market timing “scandal” may turn out to be not such a scandal after all (See Market Timing Is Legal) the publicity hurt the industry – and the late trading allegations certainly were a scandal. But there is more trouble coming down the pike – payments by the mutual fund companies to brokerage firms for selling the mutual fund products.

According to press reports, and the Wall Street Journal, the SEC is close to filing its first charges against mutual-fund companies related to arrangements that direct trading commissions to brokerage houses that favor those fund companies’ products.

According to the Wall Street Journal, the SEC has opened investigations into eight brokerage houses and a dozen mutual funds that engaged in a long-standing practice known as “revenue sharing.” Agency officials said they expect that number to increase as its probe expands. They declined to name either the funds or the brokerage houses. The SEC said payments varied between 0.05% and 0.4% of sales and as much as 0.25% of assets that remained invested in the fund. So for every $100,000 in new sales, a broker-dealer would receive between $50 and $400, plus another $250 annually for every $100,000 that remained invested.

Paying brokers a higher commission on sales of a particular product is nothing new – or is it illegal. But the SEC is going after the mutual funds for paying higher commissions – without disclosing those commissions to the mutual fund shareholders. Since the SEC is apparently going to allege that the money came directly from the fund, and not the fund manager, the fund shareholders are the ones who ultimately pay when the fund’s commission costs go up.

But like the supposed market timing “scandal”, is this a scandal? Paying for access, or carrying costs, or “shelf-space” has been going on for years, like market timing. Neither is per se illegal. Neither has a significant cost to any particular shareholder. But this is not about the exact dollar amount of the losses, or even the size of the losses.

Its about disclosure. Which is the essence of the securities law. If the disclosure laws have been violated, then enforcement actions should be commenced, and repayment made to fund shareholders. But if the violation is not significant, if there is not a serious securities fraud, the Commission has an obligation to the mutual fund industry, the brokerage community, and the investing community to disclose the results of their investigation, and to help repair the damage that has been caused by these “scandals”

SEC Readies Cases on Mutual-Fund Deals With Brokers

Why Your Broker Is Pushing That Fund (Sub)

SEC Readies Cases on Deals Between Mutual Funds, Brokers (Sub)


Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

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Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.