SEC Queries 3 Funds on Fee Calculations

The Securities and Exchange Commission has notified at least three mutual funds that they may have made the same type of mistake as money manager John Montgomery in assessing fees for outperforming the market.

The Putnam Research Fund, Gartmore U.S. Growth Leaders Fund and WWW Internet Fund disclosed in regulatory filings in recent weeks that they might have miscalculated performance-based fees. A small number of mutual funds raise their fees when they beat a benchmark such as the Standard & Poor’s 500 index.

The SEC is looking to clean up the $7.5-trillion mutual fund industry. The $5.1-million settlement last month by Montgomery and his firm, Bridgeway Capital Management Inc., focused attention on a new area of potential trouble in a business already under scrutiny for trading practices that put some long-term shareholders at a disadvantage.

“In the wake of the Bridgeway case, we have been assessing the risks industrywide with respect to performance-based fees,” said Timothy McCole, a branch chief in the enforcement division of the SEC’s Fort Worth office, which is handling the inquiry.

About 260 U.S. mutual funds use performance to determine their fees, SEC spokesman John Heine said.

Fidelity Investments, for instance, charges performance-based fees at 44 stock funds, including Fidelity Magellan, which had almost $62 billion in assets as of August, spokesman Vincent Loporchio said. The SEC hasn’t asked Fidelity for information about how it calculates fees, Loporchio said.

Funds are allowed to take higher fees for outperforming an index as long as they accept lower fees for lagging it, according to the Investment Advisors Act, which was passed more than half a century ago.

The Putnam Research Fund disclosed in a regulatory filing last month that the SEC staff had “raised issues” about whether its performance fee complied with SEC regulations. Putnam said in the filing that it might have to apply any adjustments in its fee structure to previous years.

The Putnam Research Fund obtained shareholder approval to institute a performance fee in April 1997 after disclosing the plan in a proxy, Putnam Investments spokeswoman Sinead Martin said. Putnam Investments is a unit of Marsh & McLennan Cos.

The SEC informed Gartmore that the methodology used to calculate the performance fee at U.S. Growth Leaders didn’t comply with agency rules. IPC Funds, manager for the WWW Internet Fund, said that if the SEC was correct it might have overcharged shareholders as much as $500,000.

The SEC requires funds to look back at least 12 months when comparing their results to that of a benchmark. The rule discourages mutual fund advisors from using performance-based fees because a poor record in the past can weigh down improved results later on, said Geoff Bobroff, a mutual fund consultant based in East Greenwich, R.I.

“The negative drag of weak performance can be a huge hill to climb,” Bobroff said.

Lawrence York, president of Lexington, Ky.-based IPC Funds didn’t return a call seeking comment. Edward Dunn, a spokesman for Gartmore Mutual Funds in Conshohocken, Pa., also didn’t return a call.

Last month, the SEC said Bridgeway had erred by applying a surcharge for superior five-year performance to the relatively high level of assets it has had under management just this year. The mistake resulted in Bridgeway overcharging shareholders $4.4 million, the SEC said.

Montgomery, Bridgeway’s chief executive, didn’t return a phone call seeking comment on the settlement.