As widely discussed this conference season and in recent publications, the SEC has been “fact finding” the past few months regarding intermediary fees paid by fund companies and their advisers. Over the past 10 years, distribution and shareholder servicing fee structures have become increasingly costly and, more importantly, complex in ways that make 12b-1 Plans obsolete. In addition, in the past three years, there has been a dramatic shift from network to omnibus accounts, which further complicates fee structures on different classes.
CCOs and fund boards should not take the Commission’s “fact finding” on mutual fund distribution fees lightly. Drew Bowden, deputy director of the SEC’s Office of Compliance Examinations and Inspections, likely knows from his experience at Legg Mason what skeletons lie in the closets (or should we say coffers) of broker-dealers collecting these fees. In particular, examination staff will assess whether financial intermediary fees payments comply with regulations such as Rule 12b-1 or whether they are payments for distribution and preferential treatment. Given this situation, many CCOs and boards are already trying to better grasp the situation within their own fund complex.
In working with clients regarding financial intermediary fees, we have found that many lack institutional knowledge to explain certain fee structures. They also may not know how fees and related services differ from each other, especially with regard to their application to various share classes. Given the SEC’s 2013 examination priorities regarding mutual fund distribution fees, funds and their sponsors must gain a stronger understanding of their financial intermediary fee structures and related services. To best review and analyze these fees, we recommend:
For more information on the assistance ACA Compliance Group provides investment advisers and their fund companies on evaluating intermediary fee payments, including manual and automated fee payment processes, please email Nick Prokos at firstname.lastname@example.org.