At the heart of the investigation is whether fund companies accepted kickbacks from BISYS in exchange for recommending the extension of contracts to do routine back-office work for the funds. According to the SEC settlement, BISYS and other service providers would bill fund shareholders for doing administrative work, such as preparing shareholder reports or filing prospectuses – but agreed to rebate a portion of those fees to fund advisers.
BISYS last month settled charges that it had entered into improper payment deals with various fund families (see SEC Investigation of BISYS Comes to a Close ). BISYS administered the One Group of funds until October 2000, the bank said on Friday, adding that it is seeking to review historical records to respond to the SEC, according to the WSJ.
In September, the SEC found that between June 1999 and July 2004 BISYS Fund Services (BFS) had marketing arrangements with 27 mutual fund advisers in which it set aside a portion of administrative fees to use for the marketing of those funds – charges that BFS neither admits nor denies. However, the SEC claims that BISYS paid $230 million in these so-called kickbacks from 1999 through June 2004.
At present, the specific mutual fund complexes being targeted in the investigation haven’t been identified by the SEC (last week the agency wouldn’t even acknowledge that an investigation was underway). However, published reports are beginning to fill in the gaps. Almost certainly on the list is AmSouth Bancorp, for example, who was reportedly the first to acknowledge possible charges last summer. The Wall Street Journal claims that AmSouth Bancorporation is, in fact, the Adviser A named in documents in the most recent investigation (see SEC Pries Deeper Into Mutual Fund Kickback Deals) . In 2005, AmSouth received word that it was being investigated and shortly thereafter it sold its funds to Pioneer (see Pioneer Investments to Buy AmSouth Fund Unit ).
SEI Investments recently disclosed in its 10-Q filing that the SEC is investigating it for similar-sounding practices, notes Morningstar: “We have responded and are currently responding to various regulatory examinations, inquiries and requests. One of these regulatory requests and inquiries relate to the payment by certain of our subsidiaries of expenses related to the marketing and distribution of shares of certain mutual fund clients of our fund administration and distribution business.”
Morningstar also claims to have found language similar to AmSouth’s disclosure in filings from Pacific Trust Funds advised by the Bank of Hawaii: “In addition, the Funds’ administrator, BISYS Fund Services Ohio, Inc., is currently the subject of an SEC investigation related to its past payment of certain marketing and other expenses with respect to certain of its mutual fund clients, including the Funds.” Additionally, Morningstar cites a disclosure by BNY Hamilton Funds (of Bank of New York) that says, “One of these investigations, by the U.S. Securities and Exchange Commission (“SEC”), concerns the relationship between: (1) the BNY Hamilton Funds, Inc., a family of mutual funds; (2) the Company, which acts as the investment adviser to the Hamilton Funds and provides certain other services; and (3) a third-party service provider that acts as administrator and principal underwriter of the Hamilton Funds. This investigation principally concerns the appropriateness of certain expenditures made in connection with marketing and distribution of the Hamilton Funds.”
It remains to be seen just how widespread these practices were, and what impact, if any, they had on investors. However, based on what is known at present, even if the amounts involved constitute nothing more than a redirection of revenues, it seems clear that it is yet another taint on mutual fund revenue-sharing practices – and one that the industry can ill-afford.
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