Applicable law/agency: Securities and Exchange Commission (SEC), National Association of Securities Dealers (NASD)
Related topics: Securities, Overconcentration/Failure to Diversify, Misrepresentation/Omissions
Edward Jones is accused of taking payments from seven mutual fund families in return for recommending the mutual funds to clients since the mid 1990s. The mutual fund families are known as “Preferred Families,” and include American Funds, Federated Investments, Goldman Sachs Funds, Hartford, Lord Abbett, Putnam Funds and Van Kampen Investments. Edward Jones stood to gain tens of millions of dollars in additional revenues annually by recommending funds in these families. Clients of Edward Jones were not made aware of the company’s added financial incentive for recommending these funds. The Securities and Exchange Commission (SEC) issued an order stating Edward Jones violated several federal securities laws. In 2004, Edward Jones paid a settlements totaling $75 million in connection with these violations.
SEC Issues Order Regarding Edward Jones Seven Preferred Families
From the mid 1990s until the present, Edward Jones has had selling agreements with more than 240 different mutual fund families. Seven of those mutual fund families, known as Edward Jones’s “Preferred Families” of funds, are at issue.
The Preferred Families include:
• American Funds
• Federated Investors
• Goldman Sachs Funds
• Lord Abbett
• Putnam Funds
• Van Kampen Investments
The mutual funds in the Preferred Families paid extra financial incentives to Edward Jones in return for Edward Jones soliciting/recommending its clients purchase these funds. The Security Exchange Commission (SEC) determined that the incentives were worth tens of millions of dollars each year to Edward Jones, on top of the commissions and other fees Edward Jones received for selling Preferred Families funds. The incentives proved to be powerful motivators, as more than 95% of all Edward Jones mutual fund sales were made in these Seven Preferred Families.
However, these extra incentive programs were not adequately disclosed to the clients of Edward Jones. This left clients of Edward Jones unaware that Edward Jones had a strong motivation to recommend the purchase of the Preferred Families to the exclusion of the other fund families, regardless of the client’s best interests. This breaches the rules of fiduciary duty and raises conflicts of interest issues in violation of SEC and NASD regulations.
After an exhaustive investigative process, the SEC issued an Order finding that Edward Jones violated the federal securities laws by failing to disclose its receipt of revenue sharing payments for distribution of shares of mutual funds and Section 529 college savings plans from the seven “Preferred Mutual Fund Families.” The National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) conducted separate investigations into the violations.
In December 2004, Edward Jones settled the charges brought by the SEC and the NASD as well as the charges brought by the New York Stock Exchange (NYSE). As part of the settlement, Edward Jones has paid $37.5 million in disgorgement and $37.5 million in a civil penalty for a total payment of $75 million. The distribution is for the benefit of customers who purchased mutual funds of the Seven Preferred Mutual Fund Families through Edward Jones between January 1, 1999 and the date of the SEC’s Order on December 22, 2004.
Under the terms of the SEC’s Order, Edward Jones, through an independent distribution consultant, must submit a distribution plan to the SEC to distribute the total amount of the $75 million. The distribution consultant has been appointed and is working with Edward Jones to develop the distribution plan. Once the distribution plan is submitted for SEC approval, it will be published for public comment.
Additionally, on the date that the settlement was released, the California Attorney General filed an additional suit against Edward Jones. The California Attorney General stated that he did not believe that the $75 million settlement was sufficient. The California Attorney General also stated that Edward Jones could have accepted up to $300 million in improper payments.
Edward Jones has also entered into a settlement with the securities regulators in its home state of Missouri. In the settlement, Edward Jones stipulated and agreed to findings that it failed to provide complete disclose of the revenue sharing arrangements to Missouri residents and agreed to pay fines totaling $1.5 million.
Statutes of limitation vary from state to state. In general, the statutes limit the amount of time an injury victim has to file a lawsuit. Failure to file a suit timely and properly, within the applicable limitation period, may forever bar your claim.