Money Management Executive
The Securities and Exchange Commission is investigating another third-party back-office service company for possibly improper marketing arrangements with mutual fund clients.
SEI Investments Co. of Oaks, Pa., has joined the list of providers of outsourced services to the mutual fund industry that have become the target of the regulator's scrutiny of administrative, marketing, and distribution fees clients paid as part of service contracts.
Also last week, one of SEI's administrative clients disclosed that it, too, is under the SEC's microscope. Union Bank of California, the sponsor of HighMark Funds, said: "The SEC is conducting an inquiry regarding certain practices related to our mutual fund activities. The inquiry concerns the use of a portion of the fees received under an agreement from the HighMark Funds by an unaffiliated administrator to pay expenses related to the marketing and distribution of fund shares. We are cooperating with this inquiry."
A spokeswoman for the unit of UnionBanCal Corp., which is mostly owned by Mitsubishi UFJ Financial Group Inc., confirmed the investigation and SEI's role as a provider of back-office services to the fund group but she would not offer further detail.
SEI provides administrative services to several single- and multiple-fund families, some of which are bank-sponsored. The clients include the Bishop Street Funds, managed by a unit of BNP Paribas SA; the CNI Charter Funds, managed by a unit of City National Corp. of Beverly Hills; and the Commerce Capital Funds, run by a subsidiary of Commerce Bancorp Inc. of Cherry Hill, N.J.
None of the companies have filed documents with the SEC indicating that their fund agreements are being investigated.
The SEC has raised concerns about the industry's apparent practice of bloating service fees and lack of disclosure regarding the practice. The regulator says it is concerned that these fees, which fund shareholders pay for administrative and distribution costs, are higher than they should be, and that a portion is being rebated to fund companies, which spend the money to pay other, possibly unrelated, marketing expenses.
SEI downplayed the investigation in a regulatory filing with the SEC last week. But the company revealed that though it often responds to varied regulatory requests, one of them "relates 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."
SEI's filing mentioned a recent SEC sanction against a competitor - Bisys Fund Services, the fund administrative arm of Bisys Group of Roseland, N.J. - without naming the company. The filing provided no details about SEI's practices.
SEI and the SEC would not comment for this story.
In September, after a lengthy investigation coinciding with an unrelated one of financial restatements by its parent company, the SEC sanctioned Bisys Fund Services and ordered it to pay $21.4 million, including a $10 million civil penalty.
The regulator found that from July 1999 until June 2004, Bisys had entered into undisclosed side agreements - some written, some oral - that required the company to rebate a portion of its administrative fees to 27 bank-sponsored fund groups. Excess fees were credited to a special marketing account, then used by the fund adviser to pay various expenses.
Bisys paid $230 million of kickbacks to curry favor with fund sponsors and win their repeat business, according to the SEC. In one case, the regulator found that the fees were used to pay the mutual fund company president's salary, as well as to help cover the initiation fee and monthly dues for a golf country club. Bisys neither admitted to nor denied the SEC's findings.
Industry insiders say that additional investigations of other fund service companies are likely. Among other issues, the SEC is highly concerned that neither fund investors nor, in many cases, the funds' boards were notified about such side agreements, to industry executives said.
"It is sad that some advisers don't seem to realize that fund shareholders' money is not theirs," said Meyrick Payne, principal of Management Practice Inc., a fund board consulting firm in Stamford, Conn.
In the Bisys case, several of the 27 fund firms that signed deals cited by the SEC have revealed that the regulator has stepped in to request information. These include the BNY Hamilton Funds, sponsored by Bank of New York Co., and the OneGroup Funds, now part of JPMorgan Funds.
