In the Matter of Edward D. Jones & Co., L.P.
Securities and Exchange Commission
Exchange Act Release No. 50910 (2004)
Edward D. Jones & Co., L.P. (Edward Jones) was a broker-dealer that sold mutual funds from hundreds of fund families. Revenue-sharing agreements with seven of those fund families (the preferred families) entitled Edward Jones to a portion of the advisory fees earned by the funds’ advisers. Three of the preferred families also instructed the brokerage firms executing transactions for the funds’ portfolios to direct a portion of the brokerage commissions to Edward Jones (directed-brokerage payments). The revenue-sharing agreements were very profitable for Edward Jones, representing a large percentage of its parent corporation’s net income. Edward Jones thus had a strong financial incentive to sell the preferred families’ funds instead of the funds of other fund families. Edwards Jones encouraged its investment representatives (IRs) to be mindful of the revenue-sharing agreements when making mutual-fund recommendations to customers. The IRs were given credit in their monthly profit-and-loss statements for their sales of the preferred families’ funds. Those credits increased an IR’s profitability to Edward Jones, which was a factor in determining an IR’s bonus and eligibility for promotion to limited-partner status. Edward Jones further incentivized its IRs to sell the preferred families’ funds by awarding points for those funds in a company-wide sales contest. The only mutual funds featured on Edward Jones’s public website, and in its sales literature and newsletters provided to customers, were the preferred families’ funds. Edward Jones did not disclose on its website, or in any other communications to customers, the revenue-sharing agreements, directed-brokerage payments, and other payments it received from the preferred families. Edward Jones asserted that the revenue-sharing agreements were disclosed in the statements of additional information (SAIs) the preferred families’ funds filed with the Securities and Exchange Commission (SEC), but customers were not provided with the SAIs unless they requested copies. The SEC brought an administrative proceeding against Edward Jones for violations of, among other provisions, Rule 10b-10 under the Securities Exchange Act of 1934 (Exchange Act).
Rule of Law
Holding and Reasoning ()
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