MFS to pay $50m penalty

MFS Investment Management has agreed to pay $50 million to settle federal civil fraud charges that it failed to properly disclose incentives it gave to brokerage firms to push its mutual funds over others, according to officials who have been briefed on the settlement.

The settlement, which is expected to be disclosed today, is the first to involve a mutual-fund company in the Securities and Exchange Commission's wide-ranging probe of sales practices in the investment industry.

In January, SEC enforcement chief Stephen Cutler said the agency was investigating so-called ''pay-to-play" practices at a dozen mutual fund companies and eight major brokerage firms. At the time, Cutler termed some of the arrangements the agency had uncovered ''outrageous," because they created conflicts of interest that induced brokerages to sell funds that benefited the firm, but that may not have been the most appropriate for investors.

Also yesterday, the partnership that owns the giant Edward D. Jones brokerage firm disclosed that the SEC is considering charges against it over the ''alleged favored sale or distribution" of mutual funds and the ''adequacy" of Jones's disclosure of those deals. (Story, page D4)

MFS declined to comment last night. But the settlement is the second major fraud action the Boston mutual fund company has reached with regulators this year. In February, MFS agreed to pay a combined $350 million to the SEC and New York Attorney General Eliot Spitzer to settle charges it had defrauded investors by allowing 11 of its mutual funds to be market timed, despite company policies that forbid such rapid-fire trading.

The pay-to-play case arises out of an investigation the SEC conducted of the mutual fund sales practices of Wall Street brokerage Morgan Stanley that in November resulted in a $50 million penalty. The SEC said Morgan Stanley failed to tell customers it was being paid extra to promote a select group of 16 mutual fund companies.

MFS was among the mutual fund companies that were identified at the time as paying for favorable treatment, as were Putnam Investments, Fidelity Investments, and others. Putnam has since said it ended the practice of so-called directed brokerage, but two weeks ago, its parent, Marsh & McLennan Cos., disclosed that the SEC had subpoenaed documents from Putnam and taken testimony from company employees as part of its investigation of mutual fund sales practices.

Some fund firms pay cash for these deals out of company coffers, while others use incentives such as directing trading business to the brokerage, which is paid out of fund assets and are costs borne by shareholders. Fidelity has said that it disclosed such payments to shareholders, but added that in November it stopped directing brokerage business to firms that sold its Advisors funds.

In the MFS situation, the SEC is alleging the company failed to tell shareholders that it was using fund assets by directing trading business to brokers to market its funds, according to the officials who have been briefed on the settlement.

Two weeks ago, MFS's new chairman, Robert Pozen, disclosed a series of changes intended to move the company beyond its troubles. They include suspending the use of directed brokerage to firms involved in selling its funds, and ending the use of ''soft-dollar" trading commissions to obtain stock research and statistics.

In February the SEC proposed prohibiting fund companies from using brokerage commissions to pay for the distribution of their funds. The agency said it wanted to ''end a practice that is fraught with conflicts of interest and may be harmful to funds and fund shareholders."

Andrew Caffrey can be reached at caffrey@globe.com.