Issues in Mutual Fund Revenue Sharing Payments

Revenue sharing payments are mutual fund distribution costs that conflict with continuing shareholder interests by directly reducing fund assets and shareholder returns. The “stated” purpose of revenue sharing payments is to defray broker costs of servicing customer accounts and for marketing and educational support. Revenue sharing payments do this, but more importantly they allow fund advisers to reward high selling brokers of fund shares, and to defray costs. Revenue sharing payments are not separately disclosed in fund expense ratios and for this they have been called the fund industry's “dirty little secret.” If revenue sharing payments were to be disclosed in fund expense ratios, this would reflect a move from regulatory and fund adviser slights of hand to fee transparency and reality. But, in any case, revenue sharing payments conflict with continuing fund shareholder interests and should be prohibited. Revenue sharing payments include: (1) marketing pool payments, (2) bonus compensation, (3) syndicated distributions (external source), (4) sub-transfer agency fees, (5) networking fees, and (6) “other” revenue sharing payments. In addition, adviser fall-out benefits are agreed broker rebates of so-called “excess” revenue sharing payments to mutual fund advisers. Fall-out benefits motivate fund advisers and fund brokers to make additional revenue sharing payments that benefit both parties, but not shareholders