“Massachusetts Financial Services Co. has reached a tentative agreement to pay $225 million in penalties and cut its management fees by $125 million to settle charges that it improperly allowed fast-moving traders to skim profits from long-term investors in its mutual funds, say people familiar with the matter,” writes John Hechinger in today’s Wall Street Journal.

“If made final, the settlement with New York Attorney General Eliot Spitzer and the Securities and Exchange Commission would result in the second-largest penalty exacted so far in the four-month-old mutual-fund scandal. While the general terms of the agreement have been decided, final approval is needed from the SEC commissioners, who rarely turn back such agreements with its staff.”

“Under the terms of the tentative settlement, MFS, a Boston-based unit of Sun Life Financial Inc., would pay $175 million in disgorgement and $50 million in fines, according to people familiar with the talks. The fee reductions, which would be part of MFS’s agreement with Mr. Spitzer’s office but not the SEC, would amount to $25 million annually over five years, according to these people.”

“MFS is also expected to agree to a number of changes in the way the firm oversees its funds and to provide greater information about the fees it charges investors. An MFS spokesman declined to comment on any agreement. Eighty-year-old MFS, the nation’s 11th-largest fund firm — and, by its reading of history, the oldest — has about $140 billion under management, including $76 billion in mutual-fund assets.”

“Mr. Spitzer’s focus on fees, rather than fines, has been shunned by the SEC, partly because some regulators and other critics fear he has used his prosecutorial power to set prices. But Mr. Spitzer has called fund fees the ‘800-pound gorilla’ of the industry, and maintained they should be cut when companies violate the trust of shareholders.”

“While the fines and fee cuts MFS is said to have agreed to are substantial, they are smaller than those imposed on Alliance Capital Management Holding Inc. last month. Alliance, another big mutual-fund firm, agreed to pay a $250 million fine and to make management-fee reductions of 20% for the next five years estimated to total about $350 million. The company neither admitted nor denied wrongdoing.”

“Both the Alliance and MFS cases center on ‘market timing.’ Market timers profit from discrepancies between the prices of underlying securities in mutual funds, which trade throughout the day, and mutual funds, which are priced at 4 p.m. Eastern Standard time. Timing, which isn’t illegal, essentially skims profits from long-term investors. The practice can also raise transaction costs and disrupt portfolios.”

“The differing size of the settlements reflects the different actions taken by MFS and Alliance. The amount of the market timing at MFS, involving some of its most popular funds, was substantial and appears to have been larger than at Alliance. But top executives at MFS, although believed to be aware of policies that allowed market timing, don’t seem to have negotiated the type of deals with market timers that Alliance officials made.”