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MFS Slashes Fees, Tightens Trading Rules


In the wake of a massive settlement that forced Alliance Capital to lower mutual fund fees, an increasing number of fund shops, most notably MFS Investments, are cutting back operating expenses charged to shareholders.

At first glance, the changes to the fee structures at these firms appear to be attributable to the wave of new assets coming in the door, a trend fueled by a strong rally in the stock market. Indeed, flows have been strong as evidenced by the roughly $33.5 billion U.S. diversified equity funds took in through November 2003, according to New York fund research firm Lipper.

But considering the fact that mutual funds rarely lower their fees, the timing of these revisions certainly warrants a closer look. In December, New York Attorney General Eliot Spitzer reached a settlement with Alliance following an investigation of improper trading practices at the New York-based fund manager. In addition to a $250 million fine, the company agreed to reduce management fees by 20% over the next five years, a move that would save investors up to $350 million.

Spitzer has demanded that lower fees be part of any settlement with regulators and promised he will continue to go after funds to negotiate fees at "arm's length." The Alliance settlement drew widespread criticism from industry officials who believe that Spitzer overstepped his bounds. The Investment Company Institute argues that prices should be determined by the marketplace and not by the government, state or otherwise. Since the settlement, the two sides have exchanged blows in what has become an ongoing spat over fees.

In recent filings with the Securities and Exchange Commission, at least half a dozen funds said they are lowering the limit on operating expenses. As the number of assets in a fund swells, administrative costs including transfer agency, custodian and legal fees tend to shrink as a percentage of net assets. The end result is a lower expense ratio for the fund.

Smart' Move

MFS of Boston is the most prominent firm revising its fees structure. In a series of filings entitled "supplement to current prospectus", the company lowered management fees on the $6 billion MFS International Equity Fund and the $5 billion MFS Global Equity Fund from 100 basis points to 90 basis points. In addition, MFS cut the 12b-1 fees on nine of its international funds, including the MFS International Growth Fund and MFS International Value Fund. While the maximum sales charge for Class A shares will be increased to 5.75%, the 12b-1 fees will be reduced to 0.35%, according to the filing.

"They're very smart for doing this," said Max Rottersman, president and founder of FundExpenses.com, a New York research firm that analyzes fund costs for institutional clients. "International funds are getting hotter and MFS figures they can get a two for one deal - lowering fees to look good and make it easier for people to invest in their funds."

MFS, a division of Toronto-based Sun Life Financial, has the dubious distinction of being one of the firms under investigation for engaging in improper trading practices. Regulators are reviewing whether representatives for MFS advised certain investors about how to make rapid short-term trades in its funds. MFS pledged in its prospectuses that it would deter such market timing activities, a fact that puts them on the hook for it.

While recent reports have speculated the company is nearing a settlement with Spitzer's office, MFS denied any connection between the fee cuts and the issues regulators are targeting. "We've had no discussions [with regulators] about lowering fees on our international funds," said David Oliveri, an MFS spokesman. He said that asset growth was the "single determinant" in lowering management fees on the two funds. International Equity grew to $6 billion from $1.6 billion in the two-year period extending from September 2001 to September 2003, while Global Equity rose to $5 billion from $2.7 billion during that time frame.

Also contained within those filings were new exchange policies that would more effectively curb market timing in MFS funds. The company said it will exercise its right to restrict, reject or cancel purchase and exchange orders from investors who make three exchanges of $10,000 or more in any of its international or fixed-income funds and six exchanges of $10,000 or more in any other MFS fund. In December, the company implemented a 2% early redemption fee on all its international and global funds for in-and-out trades that occur within 30 days of each other.

Economies of Scale