How much can I charge thee? Let me count the ways.

Elizabeth Barrett Browning wrote: "How do I love thee? Let me count the ways."

But in the mutual fund business, some people ask: "How much can I charge thee. Let me count the ways."

There are many smart people in the mutual fund business who spent much of their work day working on schemes to separate investors from their investments. This includes excessive fees, kickbacks, and exotic ways to funnel money back to financial professionals and fund management

Kickback Schemes
Take the case of a mutual fund record keeper named BISYS.

In an SEC investigation from 2007, BISYS Fund Services settled a case with the SEC regarding certain side agreements with fund advisers. The mutual fund advisers involved in the settlement included AmSouth Bank (now part of Regions) and its two advisor subsidiaries, AmSouth Investment Management Company and AmSouth Asset Management. In this case, BISYS performed administrative functions for the mutual fund advisers.

The case is notable since it shows the lengths a very few mutual fund professionals will go to to keep and retain business using any means available. The problem is that even though only a few people resort to these illegal acts, they invariably affect thousands of individual shareholders.

According to the SEC, BISYS entered into undisclosed, side agreements in which BISYS agreed to kick back a portion of its administration fee to the fund advisers in exchange for their promise to continue recommending BISYS as an administrator to the funds' boards of trustees.

When these undisclosed side deals were completed, BISYS paid for the adviser's marketing, and some unrelated marketing expenses to promote the funds. As one would expect, this agreement should have been disclosed to the fund trustees and the shareholders, but it was not, according to the SEC. Of course, this is not surpising since who would voluntarily disclose an under-the-table kickback scheme?

In the enforcement action, the SEC forced BISYS to reimburse over $20 million dollars to fund shareholders at 28 firms, most of which the SEC did not identify. The $20 million is composed of more than $9 million in disgorgement funds (money already paid out by BISYS) and a $10 million penalty. From 1999 to 2004, BISYS provided over $230 million from its administration fees for the benefit of the funds' advisers or third parties pursuant to these side agreements, the SEC said.

Did the Kickback Scheme Affect You?
So the questions for shareholders is: Do you know if your mutual fund company was involved in this scheme and were you ever notified of this kickback scheme and how it affected you?

This case also shows that the mutual fund business is so commoditized that a fund company record keeper would resort to bribes to keep their business. In more competitive industries, other competing suppliers would introduce new innovations or compete on price to become more competitive and win the business.

This story leaves out two key questions:
1. How did BISYS define and sudsidize "marketing expenses"?
2. How much did this bribery scheme cost shareholders. In any society worldwide, the entire population pays a price for corruption. This is even more egregious when the bribery scheme is being used to defraud investors of their retirement or college education funds.