Originally created 03/17/04

MFS to eliminate "soft-dollar" arrangements as part of reforms

BOSTON -- MFS Investment Management, one of the mutual fund companies embroiled in scandal over trading abuses, is eliminating so-called "soft-dollar" arrangements under which funds give trading commissions to firms in exchange for free stock research and data.

The decision, one of a handful of reforms expected to be formally announced Tuesday, comes a month after the Boston-based company agreed to pay $350 million and force out two top executives to settle state and federal fraud charges that it allowed improper trading.

The changes address many of the concerns raised by regulators and lawmakers, and should help reassure investors, according to Robert Pozen, MFS's new non-executive chairman.

"We want people to know that although we've had a difficult time lately, we'll do whatever's necessary to put shareholders first," Pozen said. "We want to change the rules."

Critics say soft dollar arrangements, which are common in the industry and usually not publicly disclosed, drive up fund expenses because shareholders end up paying higher-than-necessary trading fees so that management can get the research.

MFS also plans to provide shareholders with an estimated quarterly statement of fees and make mutual fund boards more independent by giving them their own lawyers and compliance officers.

Additionally, the company is toughening measures designed to prevent market timing - a type of short-term trading restricted by many funds because it skims profits from long-term shareholders - and illegal after-market trading. Regulators had accused MFS of allowing market timing for certain clients even though its official policies prohibited the practice.

Laura Lutton, a mutual funds analyst with Morningstar Inc., said the initiatives will benefit shareholders.

"It looks to me like MFS wants to be out in front of any regulatory changes that might be mandated by the Securities and Exchange Commission. MFS clearly wants to put this whole market timing and any appearance of impropriety behind them," she said.

MFS, which manages $140 billion in assets, is one of several fund companies swept up in state and federal investigations into trading abuses. Since September, dozens of financial institutions have been subpoenaed and regulators are preparing new, tougher rules for the $7 trillion fund industry.

On Monday, Bank of America and FleetBoston Financial agreed to pay a total of $515 million to resolve allegations of improper mutual-fund trading and to reduce fees investors pay by $160 million. The fund scandal settlement was the largest to date.


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