Monthly Archives: February 2016

Category: Compliance, Financial Intermediary Administration, Transfer Agency

SEC Guidance on Distribution Fees: A Closer Look


In March 2015, our post on intermediary fees included three suggested actions for fund companies to take to avoid potential enforcement actions. They were:

  1. The board first needs to set policies, consistent with the funds’ 12b-1 plan, about what the funds will pay for intermediary based shareholder services.
  2. Funds should be as specific as possible in their agreements about the services that the intermediary firm will perform specific to sub-TA, servicing and retirement fees.
  3. Funds then need to establish a repeatable process to allocate funding of intermediary fees to the funds, up to the levels agreed by the board, and then allocate the remainder to another corporate entity.


While the recent SEC guidance on distribution fees does not invalidate these recommendations, it does provide insights into the regulator’s position on the issue. There are two underlying thoughts that seem to provide the basis for the Commission’s view, one which is very clear; the other a little less so.

First, everyone understands that Rule 12b-1 prohibits funds from paying, either directly or indirectly, for distribution related activities except pursuant to a board approved 12b-1 plan. However, the Commission also believes that an intermediary firm receiving sub-TA fees to cover servicing expenses is also performing distribution related activities.

The view that some portion of the sub-TA fees is for distribution is not new. In the 1998 Supermarket Letter, the Commission expressed the same view: “When a fund participates in a fund supermarket primarily to sell its shares to investors, at least a portion of the fees must be considered to be compensation paid to the sponsor for providing distribution services.

In Distribution Fee Guidance, the SEC makes the fund board responsible for determining what portion of the sub-TA fees directly or indirectly pay for distribution activities. They further require the advisor and other parties (fund transfer agent, distributor, and fund administrator) provide the board with sufficient information to support its analysis. This information includes:

  • The specific services provided under the sub-TA agreements
  • Fees paid
  • Any changes to either the fee structures or the services provided
  • Information about the process used to determine if the fees are reasonable
  • How the board can evaluate the quality of these services
  • A view about whether any of the services provide either direct or indirect distribution benefits

As we discussed in our post last year, one way that fund boards can address this issue is by establishing caps on the amounts of sub-TA fees that can be paid from fund assets. Any fees paid in excess of this cap must be paid under the fund 12b-1 plan or by the advisor or another source (i.e., distributor).

While the SEC did not prescribe the process that the fund board should use in making its determination, they did identify scenarios that would be warning flags and may require deeper analysis and discussion.

  • Certain distribution related activities (i.e., preferred lists, access) are conditioned on the payment of sub-TA fees
  • Payment of sub-TA fees where the fund does not have a 12b-1 plan
  • Tiered payments involving a combination of fund paid 12b-1 fees and fees paid by the advisor or other affiliate
  • Sub-TA agreements that do not define the services provided or where the sub-TA fee and distribution fees are bundled
  • Large disparities in the fees paid to firms for the same services
  • Payments for sales data

At Boston Financial, we are uniquely positioned to help our clients incorporate this guidance into their oversight programs. We provide a systematic process using the best available data to validate intermediary fee invoices. With access to both the invoiced fees and the fees paid directly from our TA system, we can supply information about all intermediary fees.

Once the board has analyzed the sub-TA fees and determined what portions of the invoice are to be paid from fund assets, we can provide reporting that allocates the fees between different sources (fund CUSIP, fund 12b-1 plan, advisor, or distributor) according to the business rules provided by your board. Additionally, the systematic payments from the TA system can be established in a similar manner with clearly defined rates and funding rules for each fee type.



Category: Compliance, Industry Trends, Transfer Agency

New Year’s Regulations


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Craig Hollis, Chief Compliance Officer, recently talked with State Street’s Liz Strouse about the regulatory landscape for 2016, and its effects on their front-, middle-, and back-office partners, particularly on transfer agents (TAs). In case you don’t have access to State Street Talks archives to watch their 60-minute conversation, I offer a brief summary of their discussion.

Report Modernization

Back in May 2015, the SEC proposed several new regulations to modernize the reporting and disclosure of information by registered investment companies and registered advisors. While ultimately fund companies are responsible for reporting to the Commission, this is an area where the proposed changes potentially require engagement of the asset management firm’s team of service providers.

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Liquidity Risk Management (LRM)

Liz and Craig talked at length about the SEC’s September 22, 2015 proposal calling for open-ended funds (included ETFs but excluding money markets) to manage liquidity risk. As proposed, these rules create significant burden on the fund board to establish and document a formal LRM program, tailored to its own risk.

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The one aspect of these proposed rules that might significantly engage each of the fund company’s enterprise partners is swing pricing. Proven to be effective in Europe in times of high-trading volume associated with market duress, swing pricing seeks to offset the potential dilutive effect on existing shareholders by having those who are actively trading into or out of the fund bear their proportionate share of the trading and liquidity costs.

If the SEC rules for LRM are adopted as proposed, fund companies would have the option to include swing pricing in their LRM programs. If they choose this route, the program must include a swing factor, which is the amount the fund will adjust its NAV per share when net purchases or redemptions exceed a fund-specific swing threshold.

The TA’s primary role in swing pricing would be to support the timely and accurate daily fund flow information to fund accounting in order to determine whether or not the swing threshold has been reached. For most TAs, this type of intraday reporting is standard.

This starts to become more complicated when considering how funds can gain the same level of reliable fund flow information from other record keepers (e.g., subaccounting platforms, bank trust departments, and third-party administrators (TPAs)). Further exacerbating the issue, many omnibus record keepers and TPAs need a NAV from the fund to price transactions that are either share or percentage denominated before they can provide fund flow information back to the fund, resulting in the classic “chicken or the egg” scenario.

Proposed TA Rules

Craig and Liz next discussed the SEC’s December 22, 2015 Advance Notice of Proposed Rule Making (ANPRM) and concept release regarding modernization of TA rules, which have not been materially amended since the early ’80s. In addition to expressing a need to update the rules to reflect the current TA environment, the SEC is exploring how they might expand TA standards to omnibus record keepers.

Boston Financial analyzed both the ANPRM and the concept release, and sees them as generally aligned with what is already best practice for any leading edge, mature TA. There is little concern about the impact of the changes as presented by the SEC.

While operationally Boston Financial is in the position to comply with the updated TA rules, Craig voiced concerns about the prescriptive nature and the lack of rationale behind the proposed rule changes. He also suggested there are questions about both the need for and the security of new financial and legal data proposed for the publicly available TA-1 form. Public comments on the ANPRM and concept release are due to the SEC by Monday, February 29, 2016 and are available online.

What to Expect in 2016

At the start of the conversation, Craig praised SEC Chair Mary Jo White for the close alignment between the Commission’s mission, rule making and exam priorities.

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In 2016, fund companies and their service partners can look forward to another year of examinations focused on protecting consumers by investigating:

  • Conflict of interest, fraud, and disclosures within the intermediary community, particularly regarding
  • Market-wide risk management practices, including cybersecurity protections at large firms and clearing agencies

Ideally TAs and other front-, middle-, and back-office service providers are actively analyzing the SEC priorities, and providing their clients with a description of the controls in place around each area of focus.

At Boston Financial, we’re responding to a steady flow of pre-examination audit questions from clients, one of the many ways we provide our clients with reasonable assurance that no aspect of their compliance program is unduly exposed.

Category: Conferences and Events, Industry Trends



LEARN, DISCUSS, DEVELOP was the promise of NICSA’s Strategic Leadership Conference (SLF) recently held in Hollywood, Florida. The Boston Financial, DST, and State Street enterprise was well represented at the conference. SLF included over 300 financial services industry leaders and over 15 sessions on industry hot topics, such as DOL, Proxy, and sales enablement to name a few.

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So, what did we learn, discuss and develop at SLF?


We learned about the Middle East conflict from retired Marine Corps General John Allen. Many of us learned more about the conflict in those 60 minutes than over the past five years. We learned that the United States should be “concerned” but not “afraid” of global terrorism. We learned how important focus, integrity, trust, and credibility are in a true leader – both in the battlefield and in business. I walked away proud knowing that we have leaders in our country such as Allen.

From Suzanne Duncan, global head of research of the State Street Center for Applied Research (CAR), we learned CAR’s research has uncovered folklore in finance. Part of the folklore stems from the industry’s quest for alpha. The pursuit can skew investment decisions and behaviors as well as the allocation of capital toward it.

Investors in turn have become hyper focused on short-term goals and success, which runs counter to their long-term investment goals. This can lead to a mistrust of professional advice, overconfidence in their investing ability, and a belief they can do it on their own.

Duncan’s C-Suite panel acknowledged and recognized the importance of trust. All pointed to examples of how the industry has made good progress on addressing this folklore, while acknowledging that there is still more work to be done.


With 12 breakout sessions and four roundtables, discussions were held on leading practices ranging from intermediary oversight programs to overcoming distribution data challenges. Lee Kowarski, my colleague at DST kasina, highlighted some of the key takeaways on the sales enablement front that emerged from these discussions in his post.

Nick Horvath of DST led a panel discussion on the impacts of the DOL Fiduciary rule. This pending regulation has the potential to alter the core business model of our industry. It’s been reported that over 3K comment letters were submitted. So it wasn’t a surprise that it was standing room only for this panel.

The panelists, representing retirement, brokerage and asset management, noted they have invested significant time and resources in cross-functional teams planning for likely scenarios. Best Interest Contracts (BICs), orphan accounts, IRA rollovers, and the existing commission business and fee-based programs were the focus of the discussion.

Cindi Boudreau moderated a panel on the impact of proxy advisory firms. With speakers from Glass Lewis and Institutional Shareholder Services (ISS), I found the panel highly insightful. Cindi will be sharing her insights in Perspectives. Look for her upcoming post.


One of the reasons we attend conferences is the networking opportunities. This year, SLF did not disappoint. Close to 40 percent of the attendees polled were attending the SLF for the first time. It was great to interact with these new faces. The conference mobile app fostered a lot of collaboration and engagement. And even some friendly online competition through the app’s gamification features.

Perhaps my biggest takeaway from SLF was the new relationships and friendships I formed. And the best part – the conversations and connections created are still continuing.

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