The Markets January 14, 2010

Short-Term Redemption Fees No Longer Needed?

A new study suggests mutual fund companies might no longer need to keep in place short-term redemption fees that were imposed in 2003 as a result of controversy over market timing.
Reported by

Strategic Insight (SI), an Asset International company, asserted in a new report, “Are Short-Term Redemption Fees Still Needed?,” that market-timing activity largely aimed at taking advantage of arbitrage opportunities in international equity funds has become rare if it happens at all. As a result, SI said more than 400 individual funds have removed short-term holding redemption fees in recent years including offerings from Franklin Templeton, BlackRock, OpppenheimerFunds, MFS, Van Kampen, DWS, Dreyfus, Allianz, Pioneer, Artio, and others.

“Not surprisingly, many asset managers and their boards that instituted short-term redemption fees post-2003 have subsequently decided to remove these fees as they are no longer experiencing money movement directly related to market-timing issues and have concluded that the costs and inefficiencies of short-term redemption fees far outweigh their marginal benefits,” said SI author Dennis Bowden.

That leaves more than 1,500 actively managed, open-end stock and bond funds (managing more than a total of $1 trillion) that still have the charges in place. While the Domestic Equity category has the largest number of funds with redemption fees, International Equity funds constitute the largest in terms of total assets and second largest by number, according to SI.

Redemption-fee funds also constitute the largest share of total funds and total assets within the International Equity fund type, according to the SI data.

Bowden said funds that removed short-term redemption fees did not experience subsequent changes in asset velocity and redemption activity, and that no atypical redemption activity can be attributed to the removal of the charges. In fact, the report said, fund companies continuing to maintain the fees may now be finding they are more of a problem than a help—particularly when competing for new business.

Bowden concluded by calling for an industrywide discussion about whether the fees continue to be necessary. 

The report can be purchased at www.sionline.com.

Compliance January 14, 2010

Sterling Financial Faces Company Stock Suit

A class-action lawsuit has been filed against Spokane, Washington-based Sterling Savings Bank and its holding company, Sterling Financial Corporation, over company stock investments in the bank's 401(k) Plan.
Reported by

A news release from Hagens Berman Sobol and Shapiro, one of the law firms representing plaintiffs, said the lawsuit notes that Sterling’s stock price has imploded as the result of commercial real estate, construction and land loans, improper accounting, and inadequate capitalization. It claims Sterling and other defendants failed to properly manage retirement funds by maintaining a large investment in company stock long after the stock became an imprudent investment, in violation of the Employee Retirement Income Security Act (ERISA).

Steve Berman, a managing partner at Hagens Berman Sobol and Shapiro, contended in the press release that the bank’s matching contributions in company stock was interpreted by employees as an endorsement of the investment and further put their retirement funds at risk.

Berman said the bank failed to disclose the company’s financial problems caused by inadequately secured loans in commercial real estate, construction and land loans, and masked by allegedly improper accounting. The lawsuit charges that the company deliberately misled employees and shareholders on the value of the stock and failed to secure adequate reserves against its credit portfolio.

Employees in the class include those who owned stock in the Sterling 401(k) from July 23, 2008, to the present. Attorneys for the plaintiff estimate more than  2,500 employees in Washington, Oregon, Idaho, Montana, and California are affected by the actions listed in the complaint.

According to the release, on December 31, 2008, the plan held approximately $13 million in Sterling common stock, representing in excess of 20% of the assets of the plan. The suit claims Sterling failed to adequately and timely record losses for its impaired loans and secure assets to safeguard against its defaulting credit portfolio, and as a result, Sterling stock traded at artificially inflated prices during the class period, reaching a high of $14.72 per share on October 1, 2008. As of last Friday, the stock closed at 70 cents per share.

«