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SEC Staff Demands Heightened Board Scrutiny of Servicing Fees

The staff of the SEC’s Division of Investment Management has issued guidance advising Boards and fund managers how to assess the permissibility of fees paid to intermediaries.  The staff requires the Board to determine whether payments made to intermediaries (as sub-transfer agent, administrative, sub-accounting, or similarly-categorized shareholder servicing fees) are disguised distribution payments only permissible pursuant to shareholder-approved 12b-1 distribution plans.  The staff requires the fund’s adviser and other service providers to provide the Board with sufficient information to make such determinations.  The staff outlines the information that the Board should receive including services rendered, amounts paid, fee structures, and reasonableness.  The staff also highlights several practices that deserve heightened Board scrutiny including distribution activity conditioned on receipt of fees, the absence of a 12b-1 plan, tiered payment structures, bundling of services, and large disparities in fees paid to different third-party providers.  The staff also recommends that funds adopt compliance policies and procedures to review and identify payments that may be made for distribution-related services.

OUR TAKE: Boards should consider adding a distribution review similar to the advisory contract review process, whereby the Adviser must deliver significant information for the Board to deliberately consider any shareholder servicing payment according to the staff’s guidance.  Fund CCOs need to get working on policies and procedures and testing protocols.