Compliance February 28, 2008

FINRA Settles with Five Firms over Improper Fund Sales

FINRA (the Financial Industry Regulatory Authority) announced it has settled cases against five firms for improper mutual fund sales and supervisory violations.
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The violations include improper sales of Class B and Class C mutual fund shares and failure to have supervisory systems designed to provide all eligible investors with the opportunity to purchase Class A mutual fund shares at net asset value (NAV) through NAV transfer programs, a FINRA statement said.

For the share class sales violations, FINRA imposed an $800,000 fine against Prudential Securities and a $750,000 fine against UBS Financial Services, Inc. A $100,000 fine was imposed against Pruco Securities for improper sales of Class B shares. The firms also agreed to remediation plans that will address over 27,000 fund transactions in the accounts of 5,300 households, FINRA said.

To resolve the NAV violations, Merrill Lynch, Prudential Securities, UBS, and Wells Fargo agreed to remediation plans – estimated to exceed $20 million – for eligible customers who qualified for but did not receive the benefit of NAV transfer programs. In addition, FINRA fined Prudential Securities, UBS, and Merrill Lynch $250,000 each for failure to have reasonable supervisory systems and procedures to identify and provide opportunities for investors to obtain sales charge waivers through NAV transfer programs.

According to the announcement, from 2001 through 2004, many mutual fund families offered NAV transfer programs that eliminated front-end mutual fund sales charges for certain customers. Customers who redeemed fund shares for which they had paid a sales charge were permitted to use the proceeds to purchase Class A shares of a new mutual fund at NAV without paying another sales charge. However, FINRA found that, as a result of inadequate supervisory systems at Merrill Lynch, Wells Fargo, and UBS from 2002 through 2004, and at Prudential Securities from 2002 to 2003, certain customers eligible for the NAV programs incurred front-end sales loads that they should not have paid, or purchased other share classes that unnecessarily subjected them to higher fees and the potential of contingent deferred sales charges.

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FINRA noted that it did not impose a fine on Wells Fargo Investments because of the firm’s proactive remedial actions taken upon its discovery of the improper actions before FINRA’s inquiry. When Wells Fargo discovered it had failed to provide certain eligible customers with NAV pricing, it initiated a review of its mutual fund sales and acted promptly and in good faith to repay customers and correct its system and procedures – paying more than $612,000 in restitution to investors in Class A shares.

Each firm settled these matters without admitting or denying the allegations, but consented to the entry of FINRA’s findings.

Data & Research February 28, 2008

Participants Clueless about Retirement Income Options

The majority of retirement plan participants are not familiar with products that can provide them with a guaranteed income stream in retirement.
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A recent survey from The Spectrem Group finds that, overall, 42% of retirement plan participants say they have given the issue of how they will arrange to have a regular income paid to them in retirement more than a passing amount of thought. Those over age 55 were the most likely to have spent time considering how to provide their retirement income (59%), while those under age 45 and those with account balances of less than $10,000 have spent the least amount of time considering the issue.

About half of all participants have done some research into the issue of arranging for retirement Income, and about half of this group have discussed the issue with a professional financial adviser or have read articles in the media, the Spectrem report said. Additionally, 40% each have discussed it with family or friends or conducted online searches regarding the topic. Those most likely to have researched the issue include older participants, men, and those with account balances or household incomes in excess of $100,000.

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However, fewer than 20% of plan participants say they are very familiar with any of the four alternative approaches for arranging retirement income payments included in Spectrem’s analysis: systematic withdrawal plans; immediate pay annuities; structured bond portfolios; or laddering certificates of deposit. One-third say they are not at all familiar with systematic withdrawal plans or immediate pay annuities and over half are not at all familiar with structured bond portfolios or laddering certificates of deposit.

After seeing a definition of each of the four approaches, 45% of respondents say they would seriously consider a systematic withdrawal plan; 30% would consider laddering CDs; 24% would consider an immediate pay annuity; and 22% would consider using a structured bond portfolio. However, after seeing a statement of the drawbacks to each of these approaches in addition to the definition, the proportion who would seriously consider any of them dropped by one-third or more and half of the respondents did not select any of the four approaches as one they would seriously consider.

Spectrem also found that ensuring that a market or economic downturn does not cause a reduction in their retirement income is the objective ranked most important by plan participants, followed by minimizing the possibility of outliving the assets available for retirement.

Over 80% of participants indicated they see Social Security and a defined contribution plan balance as resources they will have in fund retirement income. In addition, 40% – 50% also reported that they will have a defined benefit plan, an IRA, equity in their primary residence, and after-tax household savings and investments available.

Among those with equity in residences, just 24% say they plan to sell their primary residence and 41% plan on selling their second or vacation home. Over 90% of those with investment real estate say this asset will contribute 40% or less of what they need to fund their retirement income.

The Spectrem findings were based on responses of a total of 402 retirement plan participants age 35 or older who were surveyed in the fall of 2007.

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