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SEC Settles Fund Switching Case
On August 28, 2000 the SEC announced that it had settled an administrative proceeding against Dean Witter Reynolds for failure to supervise a registered representative who engaged in mutual fund switching violations. In re Dean Witter Reynolds, Inc., Release No. 34-43215 (Aug. 28, 2000).
The representative was not named, and it is believed that the case against her is proceeding.
Mutual fund switching is the practice of liquidating customer holdings of investment company shares and using the proceeds to purchase shares of other investment companies. Mutual fund switching violates the antifraud provisions of the securities laws when registered representatives, in order to increase their compensation, induce investors to incur the costs associated with redeeming shares of one mutual fund and purchasing the shares of another fund and the benefit to the customer does not justify those costs.
The representative engaged in at least 48 violative switch transactions, the majority between funds with identical or very similar investment objectives. Several of these switch transactions exhibit a circular switching pattern, where the representative’s customers engaged in a series of mutual fund switches and, after generating thousands of dollars in commissions for the representative and Dean Witter and incurring thousands of dollars of contingent deferred sales charges and front-end load fees for the customers, ended up buying back into the same mutual funds that they sold in the first instance.
The SEC stated in the consent order that, while Dean Witter had written supervisory procedures, it did not have a system in place to effectively implement these written procedures.
The order includes the following criticisms of Dean Witter’s systems:
Dean Witter agreed to reimburse customers $276,702 in charges and interest, to pay a civil penalty in the amount of $200,000, and to retain an independent consultant to review its procedures. The order is available online at http://www.sec.gov/enforce/adminact/34-43215.htm
Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to email@example.com
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.
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