MFS Bans Soft Dollars for Research

Chairman Pozen announces actions to make funds more transparent and investor-friendly

Since the scandals affecting mutual fund trading practices first broke, there's been a lot of talk in the industry about doing what's right for shareholders. Boston-based MFS Financial Services is backing up the talk by promising to spend $10 million to $15 million for objective research not tied to trading commissions. In a move designed to shake up business as usual, Robert Pozen, MFS's recently appointed non-executive chairman, announced that the company will no longer pay for brokerage house research with soft dollars.

While stressing that he believes research is an important tool for fund managers, Pozen told journalists in a conference call on March 16 that not all research is created equal. "If we think outside research is valuable, we'll pay cash for it," he said. "Hopefully over time, other people will join us and we will get the [trading] commissions down."

Right now, MFS doesn't know the actual value of the third-party research it's getting; only that shareholders are paying a five-cents-per-share trading commission that includes research, whether they want it or not. Instead, Pozen would like to pay brokerage houses only for executing trades, and separately buy whatever research and other services MFS requires. "We understand that the execution-only price is not going to be five cents a share," he said.

As far as the value to shareholders, Pozen noted that if the commission could be brought down even one penny per share, that would be worth roughly $80 million to $90 million a year to MFS shareholders. He also noted that MFS would not raise its management fees to cover the estimated $10 million to $15 million a year the company will now spend to buy outside research.

The move is certainly risky. While the goal is to force brokerage houses to lower their commissions, MFS knows it doesn't have the muscle to do it alone. "We're only going to be successful at bringing down prices for our shareholders if other mutual fund companies, pension funds, the SEC, and legislators join together," Pozen said. Fidelity Investments has also publicly called for unbundling trading commissions.

The ban on soft dollars for research is only one of a series of steps announced by MFS. For one thing, the company is banning the practice of using brokerage commissions to recognize fund sales. The company has also taken steps to restore investor confidence by increasing the degree of transparency of its operations by providing more prominent disclosure of volume sales discounts and cash payments to brokers as well as full expense disclosure of estimated expenses for each shareholder based on holdings at the end of each quarter. MFS is providing a Web-based expense calculator that allows investors to calculate their actual mutual fund expenses by inputting their MFS holdings.

Finally, Pozen announced additional plans to insure the independence of MFS's mutual fund boards. In addition to having independent board chairs and independent counsel, those boards will now also have independent compliance officers.--Robert F. Keane

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