The Securities and Exchange Commission today announced the institution of a settled enforcement action against BISYS Fund Services, Inc. (BISYS), a mutual fund administrator, finding that BISYS aided and abetted over two dozen mutual fund advisers in defrauding fund investors. 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 its settlement, BISYS, a wholly-owned subsidiary of The BISYS Group, Inc., agreed to pay a total of $21.4 million, consisting of disgorgement of $9.7 million in ill-gotten gains, prejudgment interest of $1.7 million, and a $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.
Linda Chatman Thomsen, Director of the SEC's Enforcement Division, said, "Today's 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."
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 $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.
BISYS further agreed to retain the services of an independent consultant to conduct a comprehensive review of its current policies and procedures governing the receipt of revenue and payment of expenses associated with its administrative, fund accounting, and distribution services to determine if the policies and procedures provide reasonable assurance that the revenue is properly received and expenses are properly paid. The independent consultant will also review the accuracy of the disclosures to mutual fund boards concerning agreements between BISYS and the funds, advisers, banks and any related entities for administrative, fund accounting, and distribution services to determine if the policies and procedures provide reasonable assurance that such disclosures comply with applicable securities laws.
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.
