Fund Industry Opposes Disclosure of Shelf-Space Fees

Should payments made to brokerage firms by fund companies be disclosed? Most, if not all, outside fund groups make payments to brokerage firms that sell the funds' shares. Vendor payments are typically in the range of 30 to 40 basis points of new sales or assets. The fees are separate from 12b-1s. Individual brokers do not share in these payments, which essentially buy shelf space at dealers. The

Should payments made to brokerage firms by fund companies be disclosed?

Most, if not all, outside fund groups make payments to brokerage firms that sell the funds' shares. Vendor payments are typically in the range of 30 to 40 basis points of new sales or assets. The fees are separate from 12b-1s. Individual brokers do not share in these payments, which essentially buy shelf space at dealers.

The SEC is reviewing the disclosure of these so-called revenue-sharing deals (see September 2000 RR, Page 40). Currently, the agency's policy is that a general statement in the prospectus that payments are sometimes made to unnamed dealers is good enough.

The Investment Company Institute (ICI), the fund industry trade group, wants to keep it that way.

In a letter to the SEC last year, the ICI suggested disclosure should only be made “in general terms” at or before the time of sale. Specific disclosure “would entail severe practical problems, particularly because fund organizations often have differing arrangements with numerous broker/dealer firms,” the ICI wrote.

Why not disclose the actual amounts paid? “We don't think disclosure of basis points would be meaningful to investors,” says Craig Tyle, ICI general counsel, in an interview with Registered Representative.

Instead, the ICI wants to put investors on notice that payments are being made. Then, investors would “be in a position to inquire further, if they so wished,” the ICI said in its letter.

A new disclosure policy “is being worked on,” says Paul Roye, head of the SEC's division of investment management. “I can't give specifics on the timing.”

ICI Lobbies to Kill NASD Rule

An NASD rule requires disclosure of revenue-sharing deals in a fund's prospectus, including the name of the brokerage firm receiving payments and “details of the arrangements.” Member firms can accept payments only when prospectus disclosure has been made.

The Investment Company Institute wants to kill the rule in question, NASD Conduct Rule 2830(l)(4). The fund trade group says it is trying to “coordinate” the NASD's withdrawal of the requirement with the SEC's move to add a cash compensation disclosure requirement to its rule.

The NASD would not comment on whether the rule is being followed or its role in any new rule.

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