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Friday, October 08, 2004

SEC Scrutinizing Performance Fees

by: Sean Hanna, Editor in Chief

The SEC has a growing interest in performance based fees. The issue of whether funds are properly assessing these fees was raised last month when the SEC settled charges that Bridgeway Capital Management, which has a sterling reputation as a friend of shareholders, overcharged shareholders. Bridgeway paid $5.1 million to settle the civil charges. Now the SEC is looking into the fees at three more fund groups.

Bloomberg News (via the L.A. Times here) reports that Putnam Research, Gartmore U.S. Growth Leaders and WWW Internet each disclosed in recent SEC filings that the SEC's Texas regional office is looking into how they calculated performance-based fees.

"In the wake of the Bridgeway case, we have been assessing the risks industrywide with respect to performance-based fees," Timothy McCole, a branch chief in the enforcement division of the SEC's Fort Worth, Texas office told the paper.

If the SEC finds more errors, the issue has the potential to give the fund industry a black eye just as the injuries it suffered due to the Canary-related scandals begin to heal. An SEC spokesperson told the news organization that 260 funds use performance-based fees.

Included in that number are some industry heavyweights. Fidelity Investments, which was not implicated in the Canary scandals, runs 44 equity funds using performance-based fees. (Fidelity has not heard from the SEC on the matter).

What is the SEC interested in?

The filings made by funds suggests that the SEC is worried that some fund groups are not calculating fees in a way that complies with SEC rules. (In Bridgeways' case, the SEC contended the fund group did not use the proper asset figure in its calculations).  

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