The Securities and Exchange Commission’s Division of Investment Management has put out a guidance on its website cautioning mutual fund directors to more closely scrutinize the money that is paid to brokers and certain other intermediaries. The warning comes following a sweep exam, which found that fees that should be going toward record-keeping and other administrative services are instead being directed toward encouraging fund sales. A number of mutual funds, brokerage firms, investment advisers, and transfer agents were examined prior to the issuance of this guidance.
SEC rules stipulate that sub-accounting fees cannot go toward finance distribution. These fees should only go toward record-keeping and shareholder services. However, there is an issue with mutual fund-maintained omnibus accounts in which all the fees can be placed together. In such instances, payments made to brokers for selling certain funds may get buried in these administrative fees.
Now, the Commission wants fund directors to watch out for fees that intermediaries selling the funds are getting for account services. It wants these directors to establish processes to assess whether a sub-accounting fee is being harnessed to increase sales. It also is calling on fund service providers and advisers to explain distribution and servicing specifics to fund directors.
In the guidance, the SEC pointed out that mutual fund fees can directly affect investor returns, and when fees are mischaracterized to investors they may end up choosing ones they might not have otherwise because of the touted fee levels. The guidance notes that payments for distribution that are paid for by a fund must be issued under SEC Rule 12b-1.
The Mutual Fund Directors Forum, which is the interest group for fund directors, has said that they welcome the SEC’s guidance in this present distribution environment.
If you suspect that your losses are due to mutual fund fraud, contact Shepherd Smith Edwards and Kantas, LTD LLP today.
SEC warning could lower mutual fund fees paid to brokers, InvestmentNews, January 7, 2016
SEC Warns Advisors to Pay Closer Attention to 12b-1, Distribution Fees, ThinkAdvisor, January 8, 2016
The SEC Guidance Update (PDF)