As part of the settlement of all three proceedings, Edward Jones will pay $75 million in disgorgement and civil penalties. All of that money will be placed in a Fair Fund for distribution to Edward Jones customers. Edward Jones also agreed to disclose on its public Web site information regarding revenue sharing payments and hire an independent consultant to review and make recommendations about the adequacy of Edward Jones’ disclosures.
According to an Order issued by the SEC, Edward Jones entered into revenue sharing arrangements with seven mutual fund families, which Edward Jones designated as “Preferred Mutual Fund Families.”
Edward Jones told the public and its clients that it was promoting the sale of the Preferred Families’ mutual funds because of the funds’ long-term investment objectives and performance. At the same time, Edward Jones failed to disclose that it received tens of millions of dollars from the Preferred Families each year, on top of commissions and other fees, for selling their mutual funds. Edward Jones also failed to disclose that such payments were a material factor, among others, in becoming and remaining an Edward Jones Preferred Family. Edward Jones provided the Preferred Families with certain benefits not otherwise available to non-preferred families including, among other things, exclusive shelf space for the sale and marketing of their funds and exclusive access to Edward Jones’ investment representatives (IRs) and customer base. Edward Jones also exclusively promoted the 529 college savings plans offered by its Preferred Families over all other 529 plans that it had available to sell.
Linda Chatman Thomsen, Deputy Director of the Commission’s Division of Enforcement, said, “Edward Jones’ undisclosed receipt of revenue sharing payments from a select group of mutual fund families created a conflict of interest. When customers purchase mutual funds, they should be told about the full nature and extent of any conflict of interest that may affect the transaction. Edward Jones failed to do that.”
Merri Jo Gillette, Regional Director of the Commission’s Midwest Regional Office, added, “Edward Jones made affirmative representations to investors regarding its purported reasons for recommending the mutual funds offered by the seven Preferred Families, but failed to inform investors of one important factor: that it was being paid undisclosed compensation by those fund families. By not telling investors the whole story, Edward Jones violated the federal securities laws.” “Beyond its disclosure failures, Edward Jones engaged in other activities that violate NASD rules aimed at precluding conflicts of interest – including accepting directed brokerage payments and staging a sales contest to promote the Preferred Funds,” said Barry Goldsmith, NASD Executive Vice President and Head of Enforcement. “These kinds of activities increase the potential for investors to be steered into investments that serve the financial interests of the firm and its representatives instead of the best interest of the customers.”
“Firms have a responsibility to supervise all their business activities,” said Susan Light, Vice President of Enforcement, NYSE Regulation. “Edward Jones’s supervisory lapses are especially troubling in this case because of the direct conflict between the firm and its customers.”
According to the Commission’s Order, Edward Jones had entered into selling agreements with approximately 240 mutual fund families, but only the seven Preferred Families made these payments to Edward Jones. Edward Jones, its general and limited partners, and its IRs received financial benefits from the Preferred Families’ payments. Edward Jones exclusively promoted the Preferred Families’ funds over all other mutual funds. Historically, over 95% of Edward Jones’ sales of mutual fund shares have been sales of the seven Preferred Families.
In NASD’s separate settlement, in addition to the receipt of direct revenue sharing payments, NASD found that the firm gave preferential treatment to the Preferred Funds in exchange for millions of dollars in directed brokerage from three of the Preferred Fund families. This violates NASD’s “Anti-Reciprocal Rule,” Conduct Rule 2830(k), which prohibits regulated firms from favoring the distribution of shares of particular mutual funds on the basis of brokerage commissions to be paid by the fund companies.
NASD also charged Edward Jones with holding an unlawful sales contest in the fall of 2002. Winning brokers could choose a trip from among a list of 35 “world class” vacation destinations, such as Singapore, St. Martin, Davos, Biarritz and Tortola. These sales contests, which were held every six months, rewarded the winners with airfare, five-star accommodations, and treats attendees to activities such as skiing, golfing, fine dining and tours. During October 2002, Edward Jones changed the contest rules and only credited sales of funds that were on the Preferred Funds list. This violates NASD rules that prohibit product-specific sales contests that credit the sale of certain, but not all, fund sales. Indeed, some brokers complained that “doing the right thing for the client” (by recommending non-preferred funds and variable annuities) penalized their chance to earn a sales contest trip.
NASD also found that the firm failed to retain emails, failed to supervise the late trading of mutual funds, and failed to supervise the activities relating to the Preferred Funds and revenue sharing, directed brokerage, and sales contests.
New York Stock Exchange Regulation found that Edward D. Jones & Co.’s conduct was inconsistent with just and equitable principles of trade and failed to adhere to good business practices in violation of NYSE Rules 476 and 401. In violation of Rule 342, the firm failed to supervise its business with respect to revenue sharing agreements, late trading of mutual funds and email retention.
In addition to the $75 million payment, Edward Jones has agreed to be censured and to cease and desist from committing or causing violations of Section 17(a)(2) of the Securities Act of 1933, Section 15B(c)(1) of the Securities Exchange Act of 1934 and Rule 10b-10 promulgated thereunder and Municipal Securities Rulemaking Board Rule G-15. The Commission’s Order further requires Edward Jones to comply with certain undertakings, including hiring an independent consultant to review and make recommendations about the adequacy of Edward Jones’ disclosures. Edward Jones has consented to the issuance of the Commission’s Order, without admitting or denying the findings contained therein.
Additional materials: Administrative Proceeding Release No. 33-8520
