Trade Group Endorses Messaging Standard for Mutual Fund Trailer Fees
February 9, 2010
The International Securities Association for Institutional Trade Communications (ISITC) has endorsed the use of the a universal messaging format, to reduce errors involved with paper-based or inefficient communications about deferred commission payments known as “trailer fees” which are sent by mutual fund companies to distributors.
“Historically, trailer fee payments have been processed manually, and there has not been a high degree of transparency or efficiency in executing and receiving them," says Norman Papazian, executive sponsor of the ISITC payments working group and vice president at State Street.
The trade group recommended the ISO 20022 format for communications delivered over the SWIFT messaging network for clearing and settling payments involving the trailer fees.
The La Hulpe, Belgium-based Society for Worldwide Interbank Financial Telecommunications, known as SWIFT, helps create messaging standards for the securities industry which are accredited by the International Organization for Standardization (ISO). ISITC is an industry trade group focused on standards in transaction processing and related communications.
Mutual fund trailer fees are the fees paid by mutual fund companies to distributors for marketing or recordkeeping of the funds. Such fees are calculated by either the investment manager or transfer agent of the mutual fund company based on the value of the mutual fund’s assets sold by the distributor.
Information on trailer fees can also be exchanged using Swift’s older MT 102 and MT 202 formats. However, those messages didn’t contain enough information to reconcile the amounts of all payments or where they should be sent.
These problems will be eliminated with the new format.“The transfer agent or custodian bank for the mutual fund company will be able to eliminate the potential for discrepancies between the payment calculations they make and what the distributor thinks it should receive,” according to Papazian.
Even when using the ISO 20022 message scheme, ISITC also recommends that firms incorporate additional information on how the trailer fee was calculated, the mutual fund involved, the average market value of the mutual fund, the net asset value of the fund and the basis point rate.
