SEC probing kickbacks in mutual-fund business: report
November 3, 2006
BOSTON (MarketWatch) -- More than two dozen mutual fund companies are under investigation for allegedly accepting hundreds of millions of dollars in kickbacks from outside contractors, according to a published report Thursday.
The Securities and Exchange Commission probe was sparked by a $21.4 million settlement it reached in September with Bisys Fund Services Inc., The Wall Street Journal reported.
The probe could mean yet another explosive scandal for the fund
industry, already tarnished by the market-timing and late-trading abuses unearthed in 2003.
Regulators are investigating 27 fund companies and whether they took kickbacks from outside administrative contractors in exchange for granting lucrative contracts, according to the paper.
At the time of the settlement, the SEC said Bisys entered into secret side agreements between 1999 and 2004 with over two dozen mutual-fund advisers which enabled companies to improperly use shareholders' assets to pay for marketing expenses.
The unit of Roseland, N.J.-based Bisys Group Inc. agreed to terminate
the arrangements, and as part of the settlement neither admitted nor denied the allegations.
"As a direct result of Bisys's misconduct, mutual fund investors unknowingly paid millions of dollars for marketing their funds," the SEC said last month.
The SEC said the company provided over $230 million in kickbacks from its administration fees for the benefit of the funds' advisers or third parties, in side arrangements not disclosed to the mutual funds' board of trustees or shareholders.
"As noted in the SEC order, employees involved with those arrangements were either terminated or disciplined," said Bisys spokeswoman Amy Conti.
"We have devoted considerable resources to putting in place appropriate oversight and controls, and have engaged outside advisers to review our policies and procedures in an effort to ensure best practices going forward," she said.
In its Thursday story, The Journal said the SEC has sent letters to
some of the 27 fund companies requesting details about their relationship with Bisys, citing people familiar with the matter. The investigation is unlikely to target the biggest fund families, since they tend to have internal units that handle fund administrative duties such as producing shareholder reports and other documents, according to the report.
Most of Bisys's clients were mutual funds run by banks with relatively smaller asset-management businesses, the newspaper reported.
One of the companies cooperating with the SEC probe is AmSouth Bancorp. , previous owner the AmSouth Funds, which have been sold to Pioneer Investments, The Wall Street Journal said.
In recent years, regulators have stepped up their scrutiny of how fund companies use shareholder assets.
John Spence is a reporter for MarketWatch in Boston.