The SEC this week announced the institution of a settled enforcement action against BISYS Fund Services, Inc, finding that BISYS aided and abetted over two dozen mutual fund advisers in de
The SEC this week announced the institution of a settled enforcement action against BISYS Fund Services, Inc, finding that BISYS aided and abetted over two dozen mutual fund advisers in defrauding fund investors.
The SEC stated: ‘BISYS entered into undisclosed side agreements with the advisers, which enabled the advisers improperly to use investors’ mutual fund assets to pay for marketing expenses rather than paying for those expenses out of their own assets’.
As part of the settlement, the SEC stated that: ‘BISYS, a wholly-owned subsidiary of The BISYS Group, Inc., agreed to pay a total of USD 21.4 million, consisting of disgorgement of USD 9.7 million in ill-gotten gains, prejudgment interest of USD 1.7 million, and a USD 10 million civil penalty. These monies will be placed in a distribution fund to be administered by the Commission for the benefit of the harmed mutual funds’.
In the settlement, the SEC acknowledges cooperation from BISYS Fund Services BFS, and BISYS Fund Services neither admits nor denies findings of the order.
Fred Naddaff, president of BISYS Fund Services (BFS), said: ‘We are glad to have reached closure on this issue so that we can move forward to build and strengthen our business. We have implemented industry-leading best practices to ensure compliance with the highest legal and ethical standards.’
According to BISYS: ‘Between June 1999 and July 2004, BFS maintained marketing arrangements with 27 mutual fund advisers in which it set aside a portion of its administration fees to use for marketing on behalf of mutual funds. Upon learning of the practices under investigation, BFS’ senior management team and the BISYS board initiated the following actions:
- Employed outside legal counsel to conduct an internal review of all marketing arrangements
- Terminated all existing marketing arrangements
- Disciplined and/or terminated employees involved with the arrangements in question
- Implemented new compliance policies and procedures that represent industry-leading best practices.’
‘Since the investigation was initiated in early December 2004, BISYS has cooperated with the SEC, providing information and documents and making employees available for interviews and/or testimony. In accordance with the settlement, BISYS has agreed to take the following actions:
- Retain and fully cooperate with an independent compliance consultant, who will conduct a comprehensive review of BFS’ policies and procedures and report to the BISYS board and SEC.
- Retain and fully cooperate with an independent distribution consultant to oversee the distribution of approximately $21.4 million that BISYS will pay for the benefit of affected mutual funds. These amounts have been previously disclosed and reserved for by BISYS.
- Provide full cooperation with a follow-up review conducted by the independent compliance consultant to ensure implementation of any recommendations contained in the consultant’s report’.
‘BISYS Fund Services has emerged a stronger organization today than it was two years ago and has continued to attract new business and maintain client loyalty,’ said Naddaff. ‘We’ve developed and implemented a system of associate training to instill a culture of compliance, created new procedures that represent the industry’s leading best practices, and adopted a more rigorous approach to risk management. We believe there is a positive net effect that will serve to benefit our clients and their shareholders.’
Linda Chatman Thomsen, Director of the SEC’s Enforcement Division, said, "This settlement demonstrates the Commission’s commitment to rooting out fraud in all corners of the mutual fund industry. Secret arrangements such as those that BISYS entered into with over two dozen investment advisers have no place in the mutual fund industry.
Randall R Lee, Director of the SEC’s Pacific Regional Office in Los Angeles, said: "This is the Commission’s first case to highlight the role of mutual fund administrators in facilitating the use of mutual fund assets by investment advisers to pay marketing expenses. As a direct result of BISYS’s misconduct, mutual fund investors unknowingly paid millions of dollars for marketing their funds. Our settlement seeks to punish BISYS for its misconduct and to provide monies to compensate the mutual funds for their losses."
According to the SEC: ‘BISYS provides numerous administration services to mutual fund families for a fee. The Commission’s Order against BISYS finds that from July 1999 to June 2004, BISYS entered into side agreements with the investment advisers to 27 mutual fund families. These side agreements obligated BISYS to rebate a portion of its fund administration fee to (or on behalf of) the investment advisers to the funds so that the advisers would continue to recommend that BISYS be retained as the fund administrator. The side agreements enabled the advisers to use mutual fund assets to pay for marketing expenses that were incurred by the advisers to promote the funds.
On occasion, the investment advisers also used the money dedicated by BISYS under these arrangements to pay expenses that were entirely unrelated to marketing, such as for check fraud losses, seed capital for new mutual funds, and settlement of disputes with third parties. If the investment advisers had not improperly used mutual fund assets to subsidize these expenses, the advisers would have had to pay the marketing and other expenses using their own assets. BISYS provided over USD 230 million from its administration fees for the benefit of the funds’ advisers or third parties pursuant to these side agreements. The Order further finds that these side arrangements were not disclosed to the mutual funds’ boards of trustees or shareholders’.
In settling the Commission’s charges, BISYS agreed to cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Investment Advisers Act, and Sections 12(b) and 34(b) of the Investment Company Act and Rule 12b-1(d) thereunder.
The SEC stated: ‘BISYS cooperated with the Commission’s investigation and took a number of remedial steps as outlined in the SEC’s Order. BISYS consented to the issuance of the Order without admitting or denying the findings in the Order’.
The Commission’s investigation is continuing.
