Alliance Rivals Willing to Cut Fees

At least two more large mutual fund companies have told New York Atty. Gen. Eliot Spitzer that they would be willing to cut the fees they charge investors to resolve government investigations of their trading practices, a person close to the matter said Tuesday.

The offers were made after Alliance Capital Management agreed to cut its fees by $350 million and to pay $250 million in fines and restitution to settle probes by Spitzer and the Securities and Exchange Commission.

The offers by the two other fund companies -- whose names have not been released -- suggest that the Alliance deal could set off a chain reaction, with several firms agreeing to slash fees to extricate themselves from the fund industry’s worst-ever scandal.

Spitzer refused to discuss negotiations with other fund companies in an interview Tuesday. But he stressed that fee reduction was the key issue for him in the Alliance settlement.

“I would not sign the deal without it,” Spitzer said.

More than a dozen fund companies have become ensnared in the scandal. Regulators say many other firms have committed infractions and could face charges.

Alliance has agreed to cut fees on all its funds by 20% for the next five years, or roughly $70 million a year. The final settlement deal is expected to be announced Thursday. An Alliance spokesman declined to comment Tuesday.

It is unclear how many companies might promise to lower their fees or by how much, in part because the level of wrongdoing varies significantly among them.

“Not every entity will cut fees by 20%,” the source said. “Some could be more. Some could be less. But clearly it can be done and it looks as though others are prepared to do it.”

Fund fees take a direct bite out of investors’ profits. Reducing the amount that fund companies charge to manage their customers’ money would have the effect of increasing investment returns.

As part of the settlement with Spitzer, Alliance also said it would institute various corporate-governance reforms, sources said. The most significant would be the hiring of a senior official to oversee the company’s fees and make sure they are fair to shareholders, a source said.

The fee monitor, who would report directly to Alliance’s board of directors, would publish an annual report analyzing whether the fees are appropriate.

The report, which would be made public, would assess three criteria: the fees paid by large institutional investors such as pension funds for the same management services; the cost of managing the funds; and Alliance’s overall profit margins.

If Alliance’s fees were deemed to be too high and the company refused to reduce them, the fee overseer could seek competitive bids to have another management company run the funds, the source said. The fee overseer position would be a permanent one.

The fund furor that began more than three months ago has revolved around so-called market timing and late trading of mutual funds rather than fees.

New York-based Alliance has admitted that it allowed market-timing relationships that hurt investors, and at least four people have resigned from the company as a result.

In its settlement with Alliance, the SEC isn’t asking for fee reductions in part because it doesn’t want to appear to be setting market prices. Spitzer is insisting on lower fees because he believes that rising fund costs are the biggest example of the industry enriching itself at the expense of small investors.

Some critics have noted that investors, to benefit from fee reductions, would have to remain invested in funds that have been alleged to have committed serious wrongdoing.

Alliance levies some of the steepest fees in the industry. Its funds have the highest expenses of any of the 25 largest fund families, with an asset-weighted expense ratio of 1.48%, according to fund tracker Morningstar Inc.

Alliance has given Spitzer’s office a signed term sheet agreeing to the fee cut and payment of $250 million, the largest penalty assessed against a fund company.