The Securities and Exchange Commission is keeping a "laser like
focus" on problem brokers. A sneak peek into SEC's examining
brokerages in 2015 offered by a SEC official and as reported by
Reuters confirms that the regulatory body has its eyes on expensive
mutual funds. An examination earlier in May by the regulator had
found over 50% of allocated expenses and fees collected to be
inappropriate and in certain cases they were illegal too.
We at the
Mutual Fund Center
of Zacks have been stressing on the expenses of mutual funds at
regular intervals. This is crucial as many investment decisions
related to mutual funds depend a lot on how much an investor has to
shell out before he gets the desired return.
We will pick 3 high expense funds that also carry unfavorable Zacks
Rank. These funds that we have chosen are not in relation to the
SEC crack down. Instead, they have poor performance measures that
have led to an unfavorable Zacks Rank. Before we reveal the funds,
let's dig deeper into the SEC crackdown.
SEC Forms Investigation Squad for Pvt Equity & Hedge
In April this year, the SEC had reportedly set up a group to keep a
watch on private equity and hedge funds. The 2010 Dodd-Frank
necessitates that funds must be regulated. The SEC keeps examining
brokerages to see if they are complying with federal security laws.
The SEC has historically examined mutual funds for decades.
However, as Dodd-Frank act necessitates mid to large private equity
and hedge funds to register with the SEC, the regulatory body
needed to have specialist examiners, as the hedge funds hold
complex illiquid investments.
Over 50% Firms Allocated Expenses Inappropriately
Terming the findings of SEC's examination of private equity firms
as "remarkable statistics", Drew Bowden, director of the SEC's
Office of Compliance Inspections and Examinations, said that more
than half of 112 examinations conducted found inappropriate expense
The examination conducted for checking fees and expenses found
"violations of law or material weaknesses in controls". The
violations related to the expenses and fees that investors had to
Bowden said: "For private-equity firms to be cited for deficiencies
involving their treatment of fees and expense more than half the
time we look at the area is significant".
The SEC believes that investor returns are being hurt by a
combination of factors. This includes incomplete disclosures
relating to what are known as monitoring fees. These are levied by
private equity firms on companies which they own. Typically, they
are charged for board and related advisory services provided by
private equity during their duration of ownership.
High Cost Funds Beware: SEC is Watching
Kevin Goodman, head of the broker-dealer examination program for
the SEC's Office of Compliance Inspections and Examinations,
confirmed that SEC is determining "examination priorities" for
A concern that emerged out of the preliminary version of the
priorities was that brokerages are selling expensive share classes
of mutual funds. There is "an explosion" of 'L-shares', said
Goodman. These funds have very high upfront costs.
The SEC is also inclined to find out if investors are aware of the
charges they pay for different share classes. Goodman said: "We
want to make sure these share classes aren't being chosen or
marketed based on the higher commissions they generate".
The SEC is also planning to look into the brokerage firms' braches.
The examiners may focus on individual branch offices next year;
which will be picked depending on their "size, trading activities,
and sales in certain products, such as an unusual amount of risky
complex securities". Goodman said: "We want to target firms that
seem to be homes for problematic (brokers)".
Investors in mutual funds incur two primary kinds of expenses and
fees: fund expenses and loads. Whereas fund expenses are paid
indirectly from fund assets throughout the year, sales loads are
one-time fees that investors pay either at the time of purchase or
when units are redeemed. (Read:
Why Expenses are Important for Mutual Funds?
Investment decisions should factor in the cost of funds. Lower
charges will obviously allow a larger share of capital to be
invested and also help investors in earning higher profits. For
investors looking to profit from low cost funds, read
Pay Less to Earn More: 3 Low-Expense Funds to Buy
3 High-Cost, Low-Ranked Funds to Sell
Here we will share with you 3 funds with relatively high expense
ratios. These funds also carry sales load and have a negative
return over the last one year.
The funds below carry a
Zacks Mutual Fund Rank #5 (Strong Sell).
Remember, the goal of the Zacks Mutual Fund Rank is to guide
investors to identify potential winners and losers. Unlike most of
the fund-rating systems, the Zacks Mutual Fund Rank is not just
focused on past performance, but the likely future success of the
Prudential Jennison Market Neutral B
(PJNBX) seeks long-term capital gain while preserving capital
during a downturn in US equities. The fund uses "market neutral"
strategy by employing long and short positions in equity and
related securities. The short exposure, to the equities and
equity-based ETFs, are within the 60-100% range.
The fund has returned a negative 4.1% over the last one-year
PJNBX has an annual expense ratio of 4.59% as compared to category
average of 1.98%. It carries deferred sales load of 5% as compared
to category average of 1.6%.
Princeton Futures Strategy A
(PFFAX) seeks growth of capital. The fund invests in securities of
limited partnerships, limited liability companies, underlying funds
and fixed income securities. A maximum of 25% of its assets may be
invested in a wholly-owned subsidiary.
The fund has returned a negative 4.2% over the last one-year
PFFAX has an annual expense ratio of 3.49% as compared to category
average of 2.06%. It carries a front sales load of 5.75% as
compared to category average of 5.54%.
Arrow Alternative Solutions A
(ASFFX) seeks growth of capital while focusing on positive return,
low volatility and less correlation with equities. The fund invests
in fixed income securities that are issued by either US government
or its agencies. The fund also invests in domestic and foreign
The fund has returned a negative 2.9% over the last one-year
ASFFX has an annual expense ratio of 2.03% as compared to category
average of 1.73%. It carries front sales load of 5.75% as compared
to category average of 5.46%.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find
funds that not only outpaced the market in the past but are also
expected to outperform going forward. Learn more about the Zacks
Mutual Fund Rank in our
Mutual Fund Center
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