## Facts

- Edward D. Jones & Co., L.P. (Edward Jones) was a retail broker-dealer that sold mutual funds and Section 529 college savings plan interests to customers.
- Edward Jones designated seven mutual fund families as “preferred” and entered revenue-sharing arrangements under which it received portions of advisers’ management/advisory fees paid from fund assets.
- For three preferred families, advisers also arranged “directed brokerage,” under which fund portfolio commissions were directed to Edward Jones.
- The revenue-sharing and directed-brokerage payments were highly profitable and created a firm-level incentive to favor preferred funds in recommendations.
- Edward Jones incorporated these incentives into its sales structure, including representative credits tied to preferred-family sales, bonus and promotion considerations, and sales contests.
- The firm’s customer-facing materials prominently featured preferred families, reinforcing their favored status.
- The SEC found Edward Jones did not adequately disclose to customers the existence, nature, or significance of the revenue-sharing and directed-brokerage arrangements, including the resulting conflicts of interest.
- Edward Jones relied on disclosures contained in mutual fund Statements of Additional Information (SAIs), which were not routinely provided to customers and were available only upon request.
- The SEC concluded Edward Jones’s confirmations and other communications did not provide clear, direct disclosure of these material facts at the point of sale.

## Issues

1. Whether failing to clearly disclose revenue-sharing and directed-brokerage arrangements and related conflicts of interest constituted material omissions in the offer or sale of securities in violation of Securities Act § 17(a)(2).
2. Whether Edward Jones’s confirmations and transaction disclosures violated Exchange Act Rule 10b-10 by inadequately disclosing remuneration or financial interests connected to customer transactions.
3. Whether, for 529 plan transactions treated as municipal securities, Edward Jones failed to provide required disclosures in violation of Exchange Act § 15B(c)(1) and MSRB Rule G-15.

## Decision

- In a settled administrative order, the SEC found Edward Jones violated Securities Act § 17(a)(2), Exchange Act § 15B(c)(1), Exchange Act Rule 10b-10, and MSRB Rule G-15.
- The SEC censured Edward Jones and ordered it to cease and desist from further violations.
- The SEC required undertakings aimed at improved disclosures and compliance practices.
- The SEC ordered Edward Jones to pay $37.5 million in disgorgement plus prejudgment interest and a $37.5 million civil penalty (total $75 million).
- The SEC established a Fair Fund under Sarbanes-Oxley § 308(a) to distribute the monetary sanctions to affected customers who purchased preferred-family mutual funds or 529 plan interests during the covered period.

## Legal Principles

- A broker-dealer must disclose material conflicts of interest and compensation arrangements that could influence recommendations to retail customers.
- Revenue sharing and directed brokerage tied to recommended products can be material because a reasonable investor would view such incentives as important to an investment decision.
- Reliance on fund-level regulatory documents (such as SAIs) does not, by itself, satisfy a broker-dealer’s duty to provide clear, direct disclosure to its own customers.
- Exchange Act Rule 10b-10 and MSRB Rule G-15 require accurate and adequate transaction-related disclosures, including remuneration or financial interests received in connection with customer transactions, particularly where such interests bear on the objectivity of the broker’s role.

## Conclusion

The SEC determined that Edward Jones’s disclosures did not adequately inform customers of substantial financial incentives created by revenue sharing and directed brokerage tied to “preferred” funds and certain 529 plan sales, and it imposed cease-and-desist relief, undertakings, and $75 million in monetary sanctions to support customer distribution through a Fair Fund.


In re Edward D. Jones & Co., L.P., Exchange Act Release No. 50910 (SEC Dec. 22, 2004)