Hidden Mutual Fund Accounts

Investors who purchase mutual fund shares through broker-dealers, investment advisers, and other financial intermediaries are often unknown to the mutual fund because of the use of "street name" share processing. At the end of each trading day, these intermediaries bundle together all their orders for a particular mutual fund and submit one consolidated order. Each mutual fund processes this order as one "omnibus" transaction.

 

While this manner of processing mutual fund orders is efficient for intermediaries, the identity of individual investors and information about their transactions remains hidden from fund compliance personnel responsible for applying the policies and procedures outlined in a mutual fund prospectus. For example, mutual funds are not able to uniformly enforce their short-term trading rules, or apply redemption fees to discourage excessive trading, within these omnibus accounts. A similar problem exists when a mutual fund tries to ensure that the sales load discounts it offers to eligible investors are being applied correctly by broker-dealers, when critical information about the investor and his or her holdings is not shared with the fund itself.

 

Other regulatory problems have also been identified which cannot be successfully resolved without an appropriate level of information-sharing between financial intermediaries and mutual funds.

 

Since 2003, CMFI has advocated that the SEC take steps to require full transparency within these omnibus accounts, so that mutual funds can apply their prospectus policies and procedures in a uniform manner, for the protection of all investors. While the SEC has adopted a rule that permits this type of information-sharing on an occasional basis, CMFI supports a more robust approach that requires this information to be communicated on the same day as fund orders are placed, or, preferably, on a real time basis, using existing technology platforms.

 

This "back-office" problem may be news to investors, but it is spelled out quite clearly in almost every mutual fund prospectus. In carefully worded language, almost every mutual fund now discloses that the use of omnibus accounts makes it difficult, if not impossible, for a fund to apply its policies and procedures within these non-transparent accounts.

 

CMFI is looking for feedback from investors about how we can convince the SEC to amend its requlations and solve this problem. The only sensible regulatory approach is for this information to be shared between intermediaries and funds on a same-day or real-time basis. This can be done in a very cost-effective manner using technology already in use today by the mutual fund and brokerage industries.