Morningstar Has Received A Subpoena From Spitzer

The New York Times
December 16, 2004

Morningstar, the research firm known for its ratings of mutual funds, said yesterday that it had received a subpoena from the New York attorney general, Eliot Spitzer, relating to consulting services it offers to retirement plan sponsors.

The inquiry comes at a time when the research firm is already facing an investigation by the Securities and Exchange Commission regarding incorrect data that it published on a mutual fund this year.

Mr. Spitzer is seeking information from Morningstar in connection with an investigation he is conducting into the sale of variable annuities. Specifically with Morningstar, he is looking into the sale of the annuities to teachers, government employees and nonprofit organizations as part of their retirement programs, according to a person briefed on the inquiry.

The latest inquiry will probably add to the delay in Morningstar's plans to sell shares to the public.

Geoffrey Bobroff, a fund industry consultant, said Morningstar had hoped to capitalize on favorable publicity it had received in the wake of an investigation of mutual fund trading by the S.E.C. and Mr. Spitzer.

Earlier this year, Morningstar extended its rankings beyond fund performance to grade managers based on how friendly they are to shareholder interests.

"They are trying to put themselves on a pedestal with these fiduciary grades," Mr. Bobroff said. The regulatory inquiries could tarnish Morningstar's reputation.

Joe Mansueto, Morningstar's chairman and founder, said that the inquiry related to work the firm does in advising pension plan sponsors on the menu of mutual funds offered to members. That business accounts for around 1 percent of Morningstar's revenue, he said.

The company said it was cooperating with the inquiry.

Morningstar's research is used by some three million investors around the world, according to the company's Web site, along with 100,000 financial advisers and 500 institutions including pension funds.

Mr. Spitzer is looking at whether Morningstar's advice "was compromised" by payments it might have received from investment companies that wanted the research firm to recommend that their portfolios be included in annuity offerings, the person briefed on the inquiry said, adding that this aspect of the annuity investigation was at a preliminary stage.

A spokeswoman for Mr. Spitzer declined to comment.

Variable annuities are a combination of insurance and mutual funds. Fees on annuities are typically far steeper than those on conventional mutual funds, in part because they include insurance benefits.

"Annuities are almost always bad investments," said Edward A.H. Siedle, president of the Center for Investment Management Investigations, a unit of the Benchmark Companies that investigates money management abuses.

The S.E.C. has separately been investigating payments that pension consultants may receive to refer money managers to corporate 401(k) plans. That investigation continues, a spokesman for the agency said yesterday.

Morningstar remains in discussions with the S.E.C. regarding an investigation by the agency into data Morningstar published this year on the Rock Canyon Top Flight mutual fund, Mr. Mansueto said.

A spokesman for the S.E.C. declined to comment on the status of that investigation.

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