Edward D. Jones & Co. LP has agreed to pay US$75 million to settle allegations it failed to adequately disclose revenue-sharing payments received from a select group of mutual fund families it recommended to customers, the Securities and Exchange Commission said Wednesday.

On Tuesday, it was sued by California state Attorney General Bill Lockyer over similar allegations.

To settle all three proceedings with SEC, the NASD and the New York Stock Exchange, Edward Jones will pay US$75 million in disgorgement and civil penalties. The money will be placed in a “Fair Fund” for distribution to Edward Jones customers.

Edward Jones also agreed to disclose on its public Web site information regarding revenue sharing payments and hire an independent consultant to review and make recommendations about the adequacy of Edward Jones’ disclosures. Edward Jones consented to the issuance of the order, without admitting or denying its findings.

According to the order issued by the SEC Wednesday, the firm entered into revenue sharing arrangements with seven mutual fund families, which Edward Jones designated as “Preferred Mutual Fund Families.” The SEC says it told the public and its clients that it was promoting the sale of the Preferred Families’ mutual funds because of the funds’ long-term investment objectives and performance. At the same time, it failed to disclose that it received tens of millions of dollars from the Preferred Families each year, on top of commissions and other fees, for selling their mutual funds.It also failed to disclose that such payments were a material factor, among others, in becoming and remaining an Edward Jones Preferred Family.

The order finds that Edward Jones provided the Preferred Families with certain benefits not otherwise available to non-preferred families including, among other things, exclusive shelf space for the sale and marketing of their funds and exclusive access to Edward Jones’ investment representatives and customer base. It also exclusively promoted the 529 college savings plans offered by its Preferred Families over all other 529 plans that it had available to sell.

The NASD also charged Edward Jones with holding an unlawful sales contest in the fall of 2002. Winning brokers could choose a trip from among a list of 35 “world class” vacation destinations, such as Singapore, St. Martin, Davos, Biarritz and Tortola. These sales contests, which were held every six months, rewarded the winners with airfare, five-star accommodations, and treats attendees to activities such as skiing, golfing, fine dining and tours.

During October 2002, Edward Jones changed the contest rules and only credited sales of funds that were on the Preferred Funds list. This violates NASD rules that prohibit product-specific sales contests that credit the sale of certain, but not all, fund sales. Indeed, some brokers complained that “doing the right thing for the client” (by recommending non-preferred funds and variable annuities) penalized their chance to earn a sales contest trip.

NASD also found that the firm failed to retain emails, failed to supervise the late trading of mutual funds, and failed to supervise the activities relating to the Preferred Funds and revenue sharing, directed brokerage, and sales contests.

NYSE Regulation found that Edward D. Jones & Co.’s conduct was inconsistent with just and equitable principles of trade and failed to adhere to good business practices in violation of NYSE rules.

In addition to the $75 million payment, Edward Jones has agreed to be censured and to cease and desist from committing or causing violations of securities rules.

“Edward Jones’ undisclosed receipt of revenue sharing payments from a select group of mutual fund families created a conflict of interest,” said Linda Chatman Thomsen, deputy director of the SEC’s division of enforcement, in a statement. “When customers purchase mutual funds, they should be told about the full nature and extent of any conflict of interest that may affect the transaction. Edward Jones failed to do that.”

In addition, Edward Jones violated NASD rules aimed at precluding conflicts of interest — including accepting directed brokerage payments and staging a sales contest to promote the Preferred Funds. “These kinds of activities increase the potential for investors to be steered into investments that serve the financial interests of the firm and its representatives instead of the best interest of the customers,” said Barry Goldsmith, NASD executive vice president and head of enforcement.