Excessive fees plague fund reporting; will new rules fix the problem?

changing mutual fund reporting

An Investment Company Institute (ICI) survey found that funds pay 120 percent more to deliver shareholder reports to investors that own funds through brokerage accounts than those who bought funds directly from fund companies. Adoption of digital delivery methods and updated regulation should increase efficiency and transparency in the reporting process, and also lower costs.

Under the current system, funds — and, by extension, their shareholders — pay an estimated $100 million each year for shareholder reports to broker-held accounts.

Currently, brokers are tasked with handling the shareholder reports, and funds reimburse the brokers for the delivery costs. Most brokers use a single delivery vendor, Broadridge Financial Solutions. While the brokers and Broadridge negotiate the fee, the funds pay the bill. Under this system, there is no incentive to negotiate the fee lower than the maximum fee permitted.

The analysis by the ICI was conducted amid the backdrop of the SEC’s modernization of the Investment Company Act of 1940, as a request to tweak the regulatory and fee structure for mutual fund shareholder reports.

“Under Broadridge’s interpretation of applicable NYSE processing fees, ICI estimates that funds would realize no net savings in NYSE processing fees from proposed rule 30e-3,” the ICI stated in a May 23, 2016 meeting with SEC officials discussing the proposed rules.

Rule 30e-3 is the clause addressing shareholder reports in the SEC’s proposed set of changes.

from the SEC

Updating a process from the ‘40s

The Investment Company Reporting Modernization, Proposed Rule is a set of proposed rules under the Investment Company Act of 1940 which would significantly expand the information reported by registered investment companies.

Among the proposed rules are changes to the structure of the data the SEC receives from mutual fund companies. More structured data will allow the SEC to better analyze funds’ compliance and exposure to risk. In addition, the proposed rules call for publishing shareholder reports online rather than printing it on paper.

According to PwC, the SEC’s proposed rule constitutes its most significant change to the reporting regime for registered investment companies in at least a decade.

Challenges ahead

Complying with the proposed rules will not be easy for investment companies. Therein lies an opportunity, though.

“The most difficult part of compliance will be the development of appropriate technology, processes, and procedures,” noted Nathan McConarty, assistant vice president, investor services at Browns Brothers Harriman in a market commentary.

According to a Deloitte report, among the challenges investment companies face when trying to adjust to the proposed changes are interpreting inconsistencies between the current and proposed rules, developing appropriate data sourcing and aggregation processes, and increasing resources to accommodate compressed and increased filing timelines.

Deloitte asserts that while the challenges might be daunting, the proposed rule offers an opportunity to create centralized databases, automate reporting and increase internal and external oversight. Capitalizing on these opportunities will provide funds with long term benefits and ultimately make investing cheaper to the end investor.

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