Representatives of the mutual fund industry are pushing the Securities and Exchange Commission to review the processing fees funds pay to broker-dealers for sending documents to shareholders.
Under a fee schedule set by the New York Stock Exchange, funds are charged 25 cents for each document, such as an annual report, prospectus or proxy, that’s emailed to a fund investor. That charge is composed of a processing unit fee of 15 cents and a preference management fee of 10 cents for determining whether a shareholder wants a paper or an electronic version.
The Investment Company Institute, a trade association for mutual funds, asserts the charges are out of proportion with the expense of delivering documents, especially if they’re emailed. The ICI estimates the fees total more than $220 million annually across the industry.
“Investors end up bearing those excessive costs,” said Sarah Bessin, ICI associate general counsel.
The association argues the fees benefit brokerages as well as Broadridge, a major fintech company that sends fund materials to most accounts held with broker-dealers. The group has been pushing the SEC for years to allow funds to select their own vendors and negotiate prices.
A Broadridge spokesperson said the firm is aligned with the fund industry’s effort to lower investor costs. The company asserts that its system for identifying shareholders, finding the reports they need to receive and delivering them saved funds $600 million in paper, printing and postage costs last year net of the preference management fees.
“Through continuous innovation and investment with and on behalf of our bank and broker clients, Broadridge has simplified a very complex process that enables funds and corporate issuers to effectively communicate with the end beneficial investors in an efficient, reliable, and secure manner via a single 24/7 [software as a service] platform,” Broadridge spokesperson Linda Namias said in a statement.
The ICI’s effort to get the SEC involved in fee-setting policy was dealt a recent setback.
Last month, the SEC declined a request from the NYSE to shift oversight of the fee schedule to the Financial Industry Regulatory Authority Inc. The NYSE argued that Finra sets maximum processing fees that are substantially similar to the NYSE rates so that any broker that isn’t a NYSE member is charged the same rate as members.
But in an Aug. 18 order, the SEC said the NYSE failed to demonstrate that shifting responsibility to Finra for the fee schedule is consistent with the requirement that exchange rules “protect investors and the public interest and not … permit unfair discrimination between customers, issuers, brokers or dealers.”
The NYSE has petitioned for a review of the decision.
“We are deeply disappointed that the SEC’s order fails to recognize that the current processing fee schedule is fundamentally broken,” ICI General Counsel Susan Olson said in a statement at the time. “Instead of charging ‘reasonable’ fees as dictated by federal securities laws, broker-dealers are charging funds unreasonable fees for delivering investors information that, ironically, the SEC requires.”
The fact that NYSE wants to hand off the administration of the fee schedule to Finra should send a signal to the SEC, Bessin said. “We think that’s a clear basis for the SEC to step in and act,” she said.
An SEC spokesperson was not immediately available for comment.
The tension between the fund industry and Broadridge often boils down to the 25-cent processing fee per communication with shareholders. But that charge captures much more than just hitting “send” on an email, said Frank Nasta, an independent mutual fund consultant.
“They’re focusing on one data point, which has been taken out of context, on a complex and multifaceted ecosystem,” said Nasta, a former managing director and head of legal for JPMorgan Funds Management who now serves on a Broadridge advisory panel. Broadridge has “created a reliable system that works very, very well. The fees have not gone up in 20-plus years.”
But ICI maintains the fees are too high and wants funds to have direct access to their investors.
Late last month, a working group on the issue delivered a report to the SEC. It provided several different perspectives on the two types of fund shareholders — non-objecting beneficial owners, who receive communications directly from funds, and objecting beneficial owners, who receive fund communications through brokers.
The SEC’s recent order and the report point out the need for reform, said Joanne Kane, ICI senior director of operations and transfer agency.
“Both point out the SEC needs to address processing fees in the OBO-NOBO system, and now is the time to do that,” Kane said.