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March 20, 2006 at 07:00 PM
The public backlash against regulatory compliance costs in the wake of mutual fund scandals and SEC sweep exams has begun, with leaders in the industry trying to quantify the effect.
The mutual fund industry could become more concentrated and less competitive over time, according to Paul Schott Stevens, president of the Investment Company Institute, due to escalating compliance costs.
“Some of our smaller members tell us that compliance costs have reached 10% of gross revenues,” and some small mutual fund firms are withdrawing from the business while others will be deterred from entering, Stevens said during a mid-March panel on the economics of the mutual fund industry sponsored by the American Enterprise Institute in Washington.
Bob Pozen, the chairman of Boston-based MFS Investment Management, a firm that manages more than $160 billion in assets and founded the nation’s first mutual fund, focused on his own company. Pozen estimates that compliance costs are worth between two to five basis points of the fund’s investment returns or yields.
“People [at fund companies] spend millions and millions of dollars on e-mail searches,” Pozen said, noting the SEC can come in during a sweep and order up every e-mail that mentions municipal bonds. Also, companies are spending money on long-term warehouse storage for record retention requirements. “Compliance officers have the run of the farm,” at companies, he complained, suggesting it was only his imposing Yale law degree that kept some requests from compliance folks at bay.
