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Managers Keep Eye On Omnibus Accounts

Leaders Stress Need for Collaborative Approach


HUNTINGTON BEACH, Calif. - As omnibus accounts continue to grow in size and scope, it remains crucial for investment managers to keep oversight high and costs low.

Ominous in name, omnibus accounts are basically a collection of multiple accounts with undisclosed names, with a high number of tasks outsourced to intermediaries.

Financial experts stress that bank trusts, recordkeepers, broker/dealers and mutual fund companies will all have to collaborate to ensure effective compliance with Rule 22c-2 and operational controls, as well as keep a watchful eye on escalating fees, particularly as earnings continue to slump.

"There has been an increasing percentage of money going to third parties," said Thomas Hamblin, president of Capital Bank & Trust Company, at the Investment Company Institute's 2008 Operations and Technology Conference here last week. "As fees increase, so does the interest of your board. How do fund companies make sure they're paying the correct fees?"

The Securities and Exchange Commission recently revised Rule 22c-2 of the Investment Company Act of 1940, aimed at preventing market timing by allowing funds to charge a redemption fee of up to 2%. Most fund companies agree that short-term redemption fees are an effective way to deter short-term trading abuses. The rule also requires companies to be able to drill down into trading activity in omnibus accounts through their intermediaries.

"Everybody has their own view of how they want to manage these," Hamblin said. "There has been a proliferation of omnibus and super-omnibus providers, but the evolution of oversight has created a great deal of urgency."

Some of the information being outsourced to intermediaries is highly confidential and complicated, and many fund companies are concerned that the cost of the rule's requirement to review massive amounts of shareholder account information is unfairly burdensome, particularly for smaller intermediaries.

Intermediaries are coping with these issues by outsourcing their problems to third-party recordkeepers, further exacerbating the problem and creating new problems of their own.

"Does your intermediary or service provider have adequate controls?" Hamblin asked. "How do you know that your intermediary is in compliance?"

Proponents of the retirement industry complain that Rule 22c-2 shifts the burden from fund companies to retirement plan intermediaries. Some say the rule doesn't take the 401(k) structure into consideration, treating investors of mutual funds as individuals.

Large investment companies with multiple retirement accounts are increasingly combining their omnibus activity across multiple plans to create super-omnibus accounts.

Consolidation has advantages in cost savings, but super-omnibus accounts also have their own drawbacks, including a potentially greater difficulty in obtaining shareholder information, particularly when there are multiple layers of intermediaries and third parties involved.

"Trust is being outsourced to intermediaries," said Brian O'Loughlin, senior director of operations for Fidelity Investments Institutional Operations Company.

O'Loughlin said the industry needs to create an intermediary oversight program to keep an eye on recordkeepers and any other service providers that could have access to a firm's information. A good place to start is with standardized data programs that use uniform technology, he said.

"We would support an industry-wide initiative," said David Long, a principal for mutual funds at Edward D. Jones & Co. "Our objective is to supply consistent, high-level service, but I was surprised at the level of technical expertise required in regards to fund sets."

Long said his firm has an internal system to ensure quality control and he always invites trust companies to visit his offices and ask questions. He said he assumes his firm is doing a good job because few companies take him up on his offer for a tour.

Despite the rapid advances in technology, there hasn't been additional clarity in bank collectives since the '70s, said Sharon Ennis, senior vice president for Reliance Trust Company.

"Everyone is concerned about the quality of the fiduciary," she said, noting that there tends to be more clarity after a crisis.

"Bank trusts haven't quite gotten to where recordkeepers are today, probably because recordkeeping systems were designed with mutual funds in mind," Ennis said. "We need to make sure appropriate compliance exists in those intermediaries."

There are new tools available for bank trust vendors, she said, such as improved cost analysis programs and the ability to pay brokers their commission directly through the system.

"I believe these attestation goals are noble and appropriate because they're designed to protect shareholder funds," Ennis said. "Leaders of trade organizations need to be comfortable with these programs. I hope we will see leaders of trade associations working together to accomplish these goals."

She said trade leaders need to have an open dialogue to communicate how attestation goals can be met. There will likely be more paperwork, but there are benefits to having uniformity, she said. Collaboration is necessary in order to keep costs down.

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