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Funds step up patent use

Mutual fund companies are increasingly using federal patent and trademark law to help brand and protect their products and services.

Driven by heightened competition and technological advances, companies are now applying for protection for attributes- such as an investment process aided by computers and advanced quantitative calculations- once considered too esoteric to be patented. Fund companies also appear to be making more frequent use of trademark designations for new, distinctive products and services.

Patent and trademark designations are useful for protecting novel products and services from duplication, say officials from the mutual fund companies who have sought such designations. But, they also help distinguish a company's offerings from the multitude of investment products and services available. In some instances, the patent and trademark protection also can generate additional revenue in the form of licensing fees.

"I do think this is the start of something," said Dean S. Barr, a principal at State Street Global Advisors (SSgA) who helped develop what is believed to be the first patent of an investment process. "I don't think people are going to look back on it as an anomaly."

SSgA through one of its affiliates was awarded a patent in June for a computer-aided quantitative investment process which relies heavily on mathematical formulas to estimate performance of more than 3,000 stocks. Barr and a colleague developed the process, which Barr uses to manage more than $500 million in assets for SSgA institutional and high-net-worth clients. Barr said he sought the patent as a means to protect his investment process from copying and he expects other money management firms, particularly those with institutional clients, to follow suit.

Although some lawyers and others in the industry expect the push for patents and trademarks to accelerate, there is some skepticism about how useful patents can be for investment processes. Federal securities laws require a high level of disclosure before a mutual fund even can be offered for sale. That makes it relatively easy to copy the essential elements of most products not long after they are introduced, mutual fund industry executives and consultants said.

In addition, federal regulators seem unlikely to assign a patent where the investment process is driven by the skills of an individual stock picker performing financial analysis, said Mikhail Lotvin, a lawyer at Pennie & Edmonds in New York who shepherded Barr's system through the patent review process.

"I don't think you can patent something where a person looks at numbers," Lotvin said. A machine really needs to be part of the investment process, he said. Despite these reservations, Lotvin is one of those who predicted that money management firms increasingly will seek patent protection for investment processes. He said that investors who back money management firms will probably even come to expect the firms to seek patents as a means of protecting their investments.

The trend towards companies seeking patents could either be further fueled or discouraged by a case the U.S. Supreme Court is currently deciding whether to hear. The case is a dispute involving SSgA's parent, State Street Bank & Trust Co., and Signature Financial Group regarding whether a computer program that aids mutual fund administration is patentable. Last year, a federal appeals court in Washington largely rejected State Street's contention that a specialized data processing system of Signature's could not be patented. The process facilitates accounting for hub and spoke structure funds.

The relative ease of copying funds and the proliferation of investment products has made it important for firms to distinguish their products, mutual fund executives said.

New England Funds, for example, has applied to trademark the name of its new fund product, known as Access Shares. Access Shares, a first product of its kind, essentially are a fund on fund, in which a New England load fund invests in the no-load funds of two New England affiliates, Harris Associates and Loomis, Sayles & Company. A fund on fund invests in only one other fund.

The Access Shares trademark application was a move "to set ourselves apart" in the event others tried to duplicate the product, said Bruce Speca, president and chief executive officer. Given the proliferation of products in the industry, companies probably will look increasingly to trademark names, services and products that appear "brandable," Speca said.

"If you have something that will last for several years ... you definitely want to trademark it," Speca said.

New England Funds previously received a trademark for the New England Funds' slogan, "Where the best minds meet" and Speca said he expects New England Funds will be applying for more trademark designations in the future.

Charles Schwab & Co., meanwhile, over the past several years, has received trademarks on more than 100 products and services to protect the names of these products and services, said Greg Gable, a company spokesperson.

While Schwab has mostly sought trademark designations, it would also consider patenting a technology-oriented product or service, Gable said.