In Focus

January 17, 2005

he New Year has not brought glad tidings to Edward Jones and Morgan Stanley. Both brokerage firms recently were sanctioned and fined for a host of regulatory infractions.

Morgan Stanley was fined $19 million for failing to deliver stock prospectuses to 141,000 customers, conducting improper background checks on employees and failing to monitor broker correspondence. One broker team, led by Carlos Soto in Puerto Rico, misappropriated $65 million from customers as Morgan Stanley ignored red flags indicating suspicious behavior.

But Edward Jones tops the charts. A $75 million fine and the resignation of the firm's managing general partner, Douglas Hill, highlight the investor abuse. Edward Jones has admitted that it failed to disclose that it was receiving millions of dollars in undisclosed fees paid by mutual fund companies to push their mutual funds. Regulators now have forced Edward Jones to disclose such payoffs. See Revenue Sharing. http://www.edwardjones.com/cgi/getHTML.cgi?page=/USA/products/mutualfunds_revenue_sharing.html

Even before that substantial sanction, Edward Jones last fall had been fined three times. In the most egregious case, the firm was fined for pushing its brokers to sell investments on margin - which placed customers at great risk -- so that those brokers could earn bonuses, a fact undisclosed to customers. In fact, Edward Jones went so far as to publish a report internally to its brokers showing the Top 100 brokers with the highest margin balances.

Investors beware!

— James J. Eccleston
FinancialCounsel.com