ICI plan could force smaller 401(k) record keepers to close

Small- and mid-size record keepers that administer 401(k) programs for providers are concerned that a plan to ensure that mutual funds are not being "market timed" will be so expensive to oversee as to put some of them out of business. The Investment Company Institute, the Washington-based mutual fund trade association, released the plan Nov. 6 as a tool to help mutual funds review the internal controls of brokers, fund supermarkets and other financial intermediaries that hold clients' mutual fund investments. The "framework" plan, developed by a working group of ICI member firms and representatives of four national accounting firms, is meant to combat problems that have occurred involving mutual funds, most notably market timing and late trading. "This particular way of ensuring compliance would put a lot of mid-size to smaller record-keeping firms out of business," said Brian Graff, executive director and chief executive of the American Society of Pension Professionals & Actuaries in Arlington, Va. He is also staff president of the Council of Independent 401(k) Recordkeepers, a subsidiary of ASPPA, also in Arlington. Under the ICI's plan, record keepers that handle "omnibus" accounts, in which the transactions of multiple individual account holders are combined, would have to hire independent accounting firms to assess internal controls related to activities performed for shareholder accounts. The auditors would issue reports on the design and operating effectiveness of the intermediary's compliance controls. Record keepers would provide the reports to all funds for which the record keepers handle accounts. The ICI plan specifies 17 separate areas or activities that would be covered. Fund companies currently check the way their accounts are maintained by intermediaries by various means, including on-site exams that are often duplicative, the ICI said in a statement. The framework is intended to reduce the need for overlapping compliance reviews by each fund, the ICI said. The framework was developed with assistance from Deloitte & Touche LLP, Ernst & Young LLP, KMPG LLP and PricewaterhouseCoopers LLP, all of New York. "What they're suggesting is, some of the funds, if they want to do business with certain people, may require some type of certification or audit that will verify that certain compliance procedures are in place, particularly as they address controls on market timing or late-day trading," Mr. Graff said. "The cost of this particular audit is close to $200,000 to $250,000 per year," he said. "This is really intended to be for the largest financial institution intermediaries." The ASPPA, which represents small and mid-size record keepers that administer retirement plans and process trades on an omnibus basis, has been in discussions with the ICI for a more cost-effective program for smaller firms, Mr. Graff said. The ASPPA has its own certification program for record keepers that involves an audit of record-keeping practices to ensure that they are in compliance with regulations. "We recognize that not everybody is going to want to do this. This is voluntary," said Don Boteler, vice president of operations for ICI. Travis Larson, spokesman for the Securities Industry and Financial Markets Association of New York and Washington, wrote in an e-mail that the proposal "is expected to be reviewed by appropriate SIFMA committees," but SIFMA isn't prepared to comment on it yet. The mutual fund industry came under fire in a scandal that erupted in 2003 after former New York attorney general Eliot L. Spitzer began a series of investigations into abusive market timing and trading practices. Since then, the Securities and Exchange Commission has issued regulations requiring that agreements be in place between mutual funds and intermediaries to guard against illegal trading. E-mail Sara Hansard at shansard@investmentnews.com.