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03:27 PM

Hand Grenade or Golden Egg? A contrary view of the costs of compliance

While Elliot Spitzer rolled a grenade into the mutual fund industry's clubhouse, it seems that the SEC has laid a golden egg at the door.

While Elliot Spitzer rolled a grenade into the mutual fund industry's clubhouse, it seems that the SEC has laid a golden egg at the door.

The SEC's Paul Roye lambasted the mutual fund industry for its passive resistance to clearing up the sub-accounting transparency issue at the 2004 ICI annual conference. Fix it or we will,was his bottom line. Enter Rule 22c-2.

The SEC's proposed redemption fee solution, Rule 22c-2, requires a 2 percent redemption fee on trades made within five days of purchase.The rule also requires reporting of individual shareholders' federal tax ID number on all trades at all levels.

But why the resistance?

Could it be the estimated $1 billion a year the SEC thinks it will take? Could it be fear of what we'll find? Could it be the industry is just too comfortable with the status quo?

Or could it be that compliance is always a burden with no benefits - added costs with no savings, no new revenue, and no new customers?

Access Data Corp believes 22c-2 compliance will be hugely beneficial to mutual fund companies, resulting in significant cost savings and operational efficiencies, business intelligence driving customer acquisition and revenue growth, shareholder benefits and increased shareholder confidence.

The pain.

Fund directors and C-level executives across the enterprise are all faced with the same strategic issue, but are addressing it from their own tactical perspective.

  • Fund directors are being subpoenaed. They want the monkey off their back.
  • CEOs and CFOs of fund companies have liability for financial statements cobbled together from hundreds of manually created spreadsheets with no audit trail. They want their Sarbanes Oxley problem solved.

  • Independent board chairmen and directors are asking for market timing and other detailed information on all shareholders, not just named accounts. They want sub-account transparency.

  • Chief Compliance Officers hate surprises.They want one reliable, auditable source of individual shareholder transaction data, across all channels, across all funds.

  • COOs are throwing bodies and dollars at the task of aggregating and analyzing the multiple sources of information required for reporting to the enterprise. They want to cut costs and deliver accurate information, analysis and reporting.

  • Controllers are endlessly recalculating wholesaler and distributor compensation. They want it automated and correct the first time.

  • Sales and marketing execs can't tell who sold how much of what through whom, where and when.They want insight that can drive sales and customer acquisition.

  • Chief Information Officers are bearing the brunt of all of this.They want a comprehensive technology solution.

The problem.

You can't track what you can't see.

A majority of fund sales come through third parties that have not historically shared individual shareholder information with fund companies. Instead, these sales are reported daily in one lump report - or "omnibus account" - from each third-party sales institution.As a result, information on an estimated 100 million shareholder accounts - 50 percent of all mutual fund shareholder accounts - is not disclosed to fund companies.

Without this information, fund companies cannot say,"It's 4 p.m. and I know what my shareholders have done today."They can't see if shareholders have engaged in:

  • Late day trading,
  • Market timing or
  • Excessive trading

Lacking detailed shareholder information, compliance is a lot like running an auction from behind a frosted glass window: Mutual fund company managers and boards know a lot of inventory is moving and that money is changing hands, but can't tell who's doing what to whom.Yet they are held responsible for everything that goes on.

To meet new regulatory and legal requirements, fund company executives and boards need a new solution that replaces the frosted-glass fuzziness of today with a clear view of detailed shareholder transactions.

The status quo is not an option. Fund companies' existing technologies are built for processing and not information analysis and monitoring. Some fund companies estimate it could cost $10 million to build their own solution.

Legacy transfer agent systems aren't the solution, either.These systems don't retrieve detailed shareholder information from distributors.To provide detailed individual information, transfer agency systems would have to duplicate distributor data at considerable cost. Even then, they would be unable to aggregate data and make sense of it.And there would be no business rules in the software to analyze and report on trends in the data. Layering a CRM solution on top of the transfer agency data doesn't address the root problem; you still can't aggregate and analyze the subaccount detail.

The solution.

Access Data SalesVision™ has been built from the ground up with the strategic management of individual shareholder transaction information at the account and sub-account levels as its purpose. SalesVision solves the sub-account transparency issue facing mutual fund manufacturers and distributors. SalesVision is the only solution that provides transparent reporting of daily individual mutual fund shareholder activity across all distribution channels. For the first time, the board-level challenges of compliance reporting, revenue management, compensation management, and sales reporting can be resolved within one fully auditable solution.

SalesVision delivers the answers boards and fund company executives now need to fulfill their fiduciary responsibilities to shareholders and regulators by:

  • Delivering transparent reporting of daily individual mutual fund shareholder activity, across all distribution channels;
  • Providing information as a complete picture, enabling board-level management of compliance, revenue management, compensation management and sales reporting - in one fully auditable solution;
  • Efficiently cutting costs and improving the timeliness of information as it aggregates, analyzes and reports on compliance, sales compensation and revenue.

Access Data believes that compliance with the new regulations can deliver strategic benefits across the enterprise, resulting in significant cost savings and operational efficiencies, business intelligence driving customer acquisition and revenue growth, shareholder benefits and increased shareholder confidence. And whoever thought the SEC would provide such a golden opportunity?

About Access Data

Access Data works at the intersection of business and technology, enabling financial services companies to power their businesses. Access Data's client list includes more than 50 of the world's leading financial services firms. Access Data SalesVision is solving the omnibus transparency issue for firms including Bank of America, Charles Schwab, GE Asset Management, New York Life Investment Management, and State Street Global Advisors. Founded in 1997, Access Data is headquartered in Pittsburgh, with offices in Boston, Chicago, New York, Sacramento and San Francisco.

Access Data
Two Chatham Center,
2nd Floor
Pittsburgh, PA 15219
Contact: Rick Niedt,
Account Executive
ext 6045
[email protected]

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