Alliance Agreement Includes New Form Of Relief For Shareholders
Attorney General Spitzer today announced a landmark agreement to resolve charges that a leading mutual fund company permitted market timing of its funds.
Under the agreement, Alliance Capital Management will take steps to halt market timing and bolster corporate governance. In addition, in an unprecedented action, the company will slash mutual fund fees by 20 percent, and freeze the fees at that lower rate for at least a five-year period.
"This settlement will fundamentally alter the way this company is run," Spitzer said. "Instead of favoring managers, the company will now focus on the interests of investors by eliminating harmful market timing and reducing fees for all shareholders."
The 20 percent fee reduction secured by the Attorney General is valued at $70 million per year, and when combined with a $250 million restitution payment that was negotiated jointly by the Attorney General's office and the Securities and Exchange Commission, the total value of the settlement is approximately $600 million.
Spitzer praised SEC officials with whom his office worked to coordinate settlement negotiations with New York City-based Alliance.
Joint investigations by the Attorney General's office and the SEC revealed that senior executives at Alliance had authorized complex timing arrangements with 18 broker dealers and hedge fund operators in return for infusions of assets that generated management fees. The secret timing arrangements were in contrast to publically-stated policies discouraging rapid trading of Alliance funds.
"Improper trading and exorbitant fees are both consequences of a governance structure that permits managers to enrich themselves at the expense of investors," Spitzer said. "This coordinated resolution with the SEC addresses both concerns in a way that drives appropriate compensation back to investors and implements market-based reforms to protect them in the future."
In one of the key reforms in the agreement, Alliance will hire a full-time senior officer to help ensure that fees charged by the funds are negotiated at arm's length and are reasonable. The senior officer will ensure the reasonableness of fees charged to retail investors either through competitive bidding or an annual independent evaluation that considers factors including: the level of fees charged to institutional investors; the costs of providing services; and, Alliance's overall profit margins.
The senior officer will also take steps to ensure that information on the calculation of fees is fully disclosed to the public.
Other reforms included in the agreements include: a requirement that the chairman of the Alliance funds board of directors be truly independent, without any prior connection to the company, and new requirements for disclosure to investors of expenses and fees.
The matter was handled by assistant attorneys general Bruce Topman and Marc Minor, under the supervision of David D. Brown, IV, Chief of the Attorney General's Investment Protection Bureau.
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