The SEC chose not to accept that portion of the Alliance settlement that includes the fee reduction and imposes an obligation on the Alliance fund directors to publicly establish the propriety of the management fee contracts they approve. That is the SEC's prerogative. However, the SEC's statement that "this is a case about illegal market timing, not fees" reveals a fundamental misunderstanding of the root cause of the harm to investors.
As I stated in my testimony to the Senate Banking Committee four weeks ago: "... Improper trading and the exorbitant fees charged are both consequences of a governance structure that permitted managers to enrich themselves at the expense of investors ... As regulators and lawmakers, our duty to investors is to investigate every manifestation of that breach and to return to investors any and all fees that were improper or inappropriate ... The desire for increased fees led managers and directors to abandon their duty to investors and to condone improper and illegal activity. Common sense demands that we at least inquire whether the desire for increased fees also resulted in fee agreements and charges that were improper."
Alliance breached its duty to investors in two distinct ways: First, it collected management fees from certain fund shareholders while it was simultaneously undercutting them by permitting illegal market timing in their funds. Our settlement addresses that harm by requiring Alliance to disgorge the management fees it received from those funds for the periods during which market timing was permitted.
Second, Alliance breached its duty to investors by charging mutual fund investors significantly more than institutional investors for similar services. Our settlement addresses that harm by requiring Alliance to reduce fees by $350 million over the next five years.
The SEC settlement with Alliance sells investors short because it does not provide any compensation to investors for that harm. A $250 million settlement -- which is all the SEC negotiated for -- is simply inadequate to address all of the harms uncovered in our investigation.
Our settlement requires Alliance to improve its fee disclosure to investors and to elect truly independent directors. But given the record of this case, the SEC is wrong to believe that such measures alone are sufficient to compensate investors for past fee overcharges. Funds that permitted their investors to be overcharged by affiliated management companies must be held financially accountable for that conduct. Requiring them to pay back those overcharges is not "rate-setting" but merely returning to investors money that they never should have been charged in the first place.
