sends the fund company a letter ahead of time, identifying what records the SEC staff will want to see when they arrive. Attorneys review this let- ter to help the fund group respond to these requests, including identifying what is and is not applicable. In addition, attorneys may be called on to prepare further communications during the course of the examination to clarify issues that arise.
•
Representation in SEC or other legal proceedings. Mutual fund man- agement companies may become embroiled in legal proceedings just like other corporations or individuals. The SEC may institute enforce- ment proceedings, as it did in the cases of Piper Jaffray and PaineWeb- ber (discussed in Chapter 6), if the staff believe that someone has acted illegally. Occasionally shareholders and others fi le suits against a fund’s directors, management company, or investment advisor. In all such cases, the organizations or individuals involved must be advised and represented by counsel.Legal expense varies considerably from fund to fund according to several factors. A fund uses more legal service (and pay more) when it is being set up or is making signifi cant changes in its organization, when it is under regula- tory scrutiny (such as an SEC examination), or when some external event, such as a merger or lawsuit, calls for unusual levels of legal work. Over 160 law fi rms provide legal services to open-end mutual funds, with no single fi rm controlling more than about seven percent of the market, according to Strate- gic Insight data as of the end of 2004.
Fund Accounting, Audit, Legal, and Other Support Functions 153 requirements of federal and state regulatory agencies. (For example, they must monitor the personal securities trades made by all individuals deemed to be “access persons” for the fund.) They must follow the tax guidelines of the IRS and the individual state governments (as to when a municipal issue qualifi es for state tax exemption, for example). They must fi le the required fi nancial reports with the regulatory agencies (such as the semi-annual reports to the SEC). Responsibility for these compliance and reporting functions falls to the fund administration group.
Most often, this group is housed within the management company.
Some service providers offer fund administration outsourcing, typically in conjunction with other services, such as custody, fund accounting, and shareholder processing. The amount and type of these administrative func- tions performed by the service providers account for some of the variation in fees that funds pay for investment advisory, fund accounting, custody, and legal service.
One may be able to determine how a particular fund’s administration is handled by accessing the fund’s registration form in the EDGAR database, available via the SEC’s Web site. The SEC requires mutual funds to elec- tronically fi le many of their submissions, including Form N-1A, the regis- tration statement. Item 15—Investment Advisory and Other Services—in the Statement of Additional Information describes the fund’s agreements with the investment advisor, principal underwriter, and other signifi cant service providers. Item 29—Management Services—in the Other Information section provides a summary of any substantive provisions of management-related ser- vice contracts that have not been discussed in earlier sections.
For example, the Pioneer America Income Trust fi led a post-effective amendment (number 14) to its registration on February 19, 1999, and this is available from EDGAR. As exhibits to this fi ling, the fund has attached not only the text of the administration agreement it has executed with Pio- neering Management Corporation, but also a detailed list of services to be provided. These lists, which are organized into two broad categories—fund accounting, administration, and custody services; and legal services—are reproduced in Figure 7.3. The information in this registration reveals that Pioneering Management performs almost all fund administration for its funds internally, only using outside counsel for some legal functions. Other funds may take quite different approaches to obtain these services. For example, perusal of the November 30, 1999, post-effective amendment fi led by the Eaton Vance Income Fund reveals that it contracts with its custodian, Investors Bank and Trust, for fund accounting as well as the preparation of shareholder reports.
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Figure 7.3 Excerpt from Pioneer America Income Trust Form N1-A.
EXHIBIT 2: PIONEERING MANAGEMENT CORP.
Fund Accounting, Administration, and Custody Services (FAACS)
List of Services Provided to Pioneer Mutual Funds Services Listed by FAACS Team, or Functional Area.
FAACS Administration
•
Provide direction, supervision, and administrative support to all FAACS teams•
Prepare or review and submit all tax reports for funds•
Oversee fund distributions for regulatory compliance•
Assist in planning for new product introductions Fund Accounting•
Maintain all accounting records for funds•
Calculate and report daily net asset values per share and yields•
Recommend income and capital gains distribution rates•
Prepare funds’ fi nancial statements and assist in fund audits•
Maintain accounting records for institutional portfolios•
Perform periodic tests to verify each fund’s compliance with its prospectus and applicable regulations Global Custody and Settlements Division•
Enter portfolio trades into Fund Accounting records•
Support corporate actions analyses•
Validate trade data and communicate them to Custodian Banks•
Act as liaison with Custodian Banks for trade settlements, and security position reconciliations, and for relaying global market updates to Investment Advisor•
Provide daily cash reporting to portfolio managers•
Resolve trade disputes with counterparties Pricing and Corporate Actions•
Ensure accuracy and timeliness of prices supplied by external sources to provide daily valuations of all security positions held by every fund•
Validate and communicate corporate/class action information to Fund Accounting•
Present monthly valuation report to funds’ Board of Trustees•
Provide valuation and corporate actions services for securities held by institutional portfolios, but not by funds•
Provide systems support to users of fund accounting and portfolio pricing software, and manage relationships with applicable software and hardware vendors•
Develop and maintain custom applications and systems interfaces for FAACS teams•
Manage Year 2000 project•
Provide user support and vendor liaison for trading, compliance, and analysis systems•
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Fund Accounting, Audit, Legal, and Other Support Functions 155
PIONEERING MANAGEMENT CORP.
Fund Accounting, Administration, and Custody Services (FAACS)
List of Services Provided to Pioneer Mutual Funds Services Listed by FAACS Team, or Functional Area.
Shareholder Reporting and Audit Liaison
•
Review and complete funds’ fi nancial statements•
Manage the Fund Audit process to ensure timely completion of shareholder reports•
Prepare reports related to contract renewals and soft dollar payments for Board of Trustees’ review•
Provide fi nancial information to Legal Department for prospectus updates and other regulatory fi lings•
Prepare regulatory reports such as N-SAR, Form S, and EDGAR fi lings•
Provide fi nancial information to Pioneer management and industry trade groups•
Provide liquidity, commission, and soft-dollar reporting to Pioneer management Funds Controller•
Manage fund expense payment cycles (e.g., timeliness and accuracy of payments, allocation of costs among portfolios)•
Coordinate and standardize fund expense accruals and forecasting•
Provide expense reporting to Fund Accounting, FAACS management, and auditors•
Compile daily reports of shareholder transactions from all sources (e.g., PSC, PMIL, BFDS, variable annuity agents, 401(k) administrators, third-party record keepers) for entry into fund records•
Provide daily reconciliation of receivable, payable, and share accounts between fund records and entities listed above•
Manage the daily estimating process to minimize “as of” gains and losses to funds•
Communicate daily fund prices and yields to PSC, PMIL, etc.•
Provide fund-related analyses to Pioneer managementEXHIBIT 3: THE PIONEER GROUP, INC. —LEGAL DEPARTMENT Reimbursable Services:
Filings under Investment Company Act of 1940 and Securities Act of 1933
•
Prepare and File (via EDGAR) Rule 24f-2 Notices (coordination with Pioneer Fund Accounting and Hale and Dorr LLP as necessary)•
SEC Electronic Filing (EDGAR) Responsibilities- Prepare Fund Registration Statements and Related Filings for fi ling on EDGAR and complete fi lings - Maintain and develop enhancements to Pioneer’s EDGAR systems and procedures, including
contingency planning
- Maintain EDGAR-related databases and document archives - Liaison with third-party EDGAR agents when necessary
- Prepare proxy statements and related materials for fi ling on EDGAR and complete fi lings Figure 7.3 (continued)
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Blue Sky Administration (State Registration)
•
Principal liaison with Blue Sky vendor (Bluesky MLS, Inc.)•
Coordinate SEC fi ling schedule and fund documentation with Blue Sky vendor•
Monitor status of state fi lings with Blue Sky vendor•
Transfer Agent coordination•
Review vendor statements and invoices•
Conduct vendor due diligence, as appropriate - Hiring oversight- In-person meetings - Arthur Andersen audit Miscellaneous Services
•
Assist Pioneer Fund Accounting in the preparation of Fund Form N-SARs•
Managing internal participation in prospectus simplifi cation project. Charge funds only for portion that relates to funds—this excludes work on behalf of distribution or management companies, including coordination internally.Non-Reimbursable Services:
Filings under Investment Company Act of 1940 and Securities Act of 1933
•
Maintain Pioneer Mutual Funds SEC Filing Calendar•
Interact as necessary with the staff of the investment advisor, distribution company, and transfer agent to ensure awareness of fund disclosure requirements•
Coordinate internal review of Prospectuses and SAIs•
Coordinate Hale and Dorr LLP review and internal review of Hale and Dorr LLP material•
Identify business and other situations that trigger requirement to supplement Prospectuses and SAIs Proxy Statements•
Assist Hale and Dorr LLP in the preparation of proxy statements•
Coordinate internal review of proxy statements and related documents•
Review proxy-related materials prepared by the distribution company to ensure compliance with regulatory requirements•
Review the transfer agent’s proxy solicitation efforts to ensure compliance with regulatory requirements•
Act as liaison between Hale and Dorr LLP and transfer agency staff with respect to the proxy solicitation processMiscellaneous Services
•
Monitor the preparation of shareholder reports by the distribution company•
Prepare and File (via EDGAR) Section 16 fi lings (re: Pioneer Interest Shares)•
Maintain Offi cer and Trustee Securities Holdings (fund and non-fund related)•
Code of Ethics Administration (as it relates to Disinterested Trustees) Regulatory Oversight•
Monitor proposed changes in applicable regulation and inform appropriate Pioneer personnel of the proposals and impact on funds•
Act as liaison with Hale and Dorr LLP in the implementation of changes Figure 7.3 (continued)NICSA Book_Ch-7REVsave.indd 156
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Fund Accounting, Audit, Legal, and Other Support Functions 157
Special Projects
•
Coordinate implementation of Document Directions software system (for prospectus production) purchased by Pioneer in late 1997•
Provide advice with respect to Year 2000 issues•
Prospectus simplifi cation efforts on behalf of distribution or management companies, including internal coordinationSource: Pioneering Management Corp.
Figure 7.3 (continued)
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159
chapter 8 | Fund Distribution:
The Broker Channel
Mutual fund companies have three choices. They can use brokers to sell the fund. They can pull in buyers through advertising. Or they can starve.
—The San Francisco Chronicle (1986)1 For over 40 years—from the passage of the Investment Com- pany Act in 1940 until after the adoption of Rule 12b-1 in 1980—this description of how mutual funds were sold held true. During that period, the industry divided neatly into two camps: load funds sold through brokers who earned a com- mission on each sale, and no-load funds directly marketed to investors with no commission involved. Over the past 25 years, however, the industry has evolved into a much more complex and fragmented pattern of channels through which funds are sold.
Today, investors can buy funds via a wide variety of inter- mediaries as well as directly from the fund companies. They may or may not pay sales commissions and, if they do, they may pay them when they buy the fund shares, when they sell them, and/or periodically as they hold the fund. This chapter and the following two chapters explore these and other, topics in mutual fund distribution: how it evolved, how funds are sold to investors; the organizations and individuals who do this sell- ing; how they are organized and compensated; and the atten- dant issues and controversies.