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Rating:Bisys Settlement Could be Tip of the Iceberg Not Rated 3.1 Email Routing List Email & Route  Print Print
Wednesday, September 27, 2006

Bisys Settlement Could be Tip of the Iceberg

Reported by Sean Hanna, Editor in Chief

Revenue sharing is getting another black eye with Bisys' settlement with the SEC of allegations that it assisted 27 fund firms in a scheme that diverted shareholder assets into the pockets of the fund advisors. In at least one case those funds were used to pay golf club membership fees and the salary of a fund firm president.

Essentially, the SEC complaint alleges that Bisys Fund Services rebated some of the fees it collected from funds for providing administrative services. The funds then used the rebates to pay for marketing expenses. Altogether Bisys provides fund support services to 50 fund families with $275 billion in assets.

The SEC started its investigation into the practices at Bisys in early December 2004. Whether it will continue to pursue separate cases against any of the 27 fund firms is not clear at this time, but such action is highly probable. The funds involved in the scheme were bank-sponsored, according to the SEC complaint. None of the 27 fund firms were identified by name in the complaint.

The scheme as described by the SEC would allow funds to sidestep disclosure requirements that are needed to use fund assets to pay for marketing and distribution costs. Many top executives in the fund industry have justified the lack of disclosure by arguing that their firms use the advisor's assets and not those of the funds to pay for these expenses.

The SEC also alleges that in some cases the rebates were used by the fund advisor to pay for costs entirely unrelated to the funds' marketing and distribution.

In exchange for the rebates the 27 funds involved in the matter recommended to their boards that Bisys Fund Services be hired or retained by the funds.

In all, Bisys kicked back as much as three-quarters of its administrative fee to the fund advisor, according to the SEC complaint.

According to the SEC, Bisys collected some $10 million in improper profits from the 27 funds tied to the investigation. It will repay those profits, plus an additional $10 million in fines and $1.4 million in interest to settle the SEC's complaint. Bisys neither admitted nor denied wrongdoing as part of its settlement.

Fred Naddaff, president of BISYS Fund Services, said that Bisys has "implemented industry-leading best practices to ensure compliance with the highest legal and ethical standards." He added that the firm also hired outside legal counsel to conduct an internal review of all marketing arrangements; terminated all existing marketing arrangements; disciplined employees involved with the arrangements in question (in some cases terminating the employees) and implemented new compliance policies and procedures that represent industry-leading best practices.

Naddaff did not identify any of the executives disciplined by the firm.

According to the SEC complaint, Bisys entered into the agreements with fund firms between June of 1999 and July of 2004. In 12 of the cases documented by the Commission, Bisys entered into a written contract to create the arrangement. In the remaining 15 cases the two sides made oral agreements.

During that period Bisys Fund Services set aside roughly $230 million from its fund administration fees for use in the funds' marketing budgets.

Bisys and the fund advisor would typically enter into a side agreement related to the proposed administration contract that would describe how the administrative fees would be used by the advisor and Bisys. In many of the cases Bisys would pay a sub-administration fee to the advisor along with a marketing fee and net Bisys administration fee. The side agreement would become binding when the fund board renewed the administrative contract or other service agreement or when the advisor recommended Bisys as a vendor.

Until May 2003 Bisys would book the entire administrative fee as revenue. It would simultaneously create a liability for the marketing fees it had agree to pay the fund advisor.

In many cases, Bisys would work with the fund advisor to create a marketing campaign for the funds. Those efforts would include wholesaler costs, website design, advertising and training. However, until the fall of 2003 the SEC found that Bisys had no formal guidelines or policies governing what could be considered a marketing expense. Those loose standards allowed some fund advisors to cover the costs of check fraud losses, settlement of losses due to errors and settlements with custodians with the marketing funds. Some fund advisors also tapped the marketing funds for seed capital for new funds.

When some fund firms exceeded the marketing budget created by the side agreement, Bisys covered the excess charges in exchange for additional recommendations.

At least one fund advisor (identified as "Adviser A" in the complaint) used the marketing fees to pay for golf country club memberships, the salary of its president, printing costs and the settlement of a dispute with its custodian.

Fund advisors that terminated their relationships with Bisys were paid the remaining marketing account balance in some cases. Other times, Bisys retained the funds for its own use. In all, it kept nearly $10 million in that manner.  

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