A majority of investors purchase mutual fund shares through brokers, financial advisors and other intermediaries. Many of these financial intermediaries do not place individualized trading orders for each of their customers, preferring to aggregate all customer transactions into one consolidated purchase or redemption request on each day the markets are open. This aggregated order is called an omnibus account.
While the omnibus accounting process may be efficient for transacting in fund shares, the identities of individual investors and necessary information about their transactions are typically hidden from mutual fund compliance personnel. This lack of transparency at the individual account level makes it difficult, if not impossible, for mutual funds to uniformly apply the policies and procedures contained in their prospectuses filed with the SEC.
Since the market timing and late trading scandals of 2003-2004, the regulatory problems caused by omnibus accounts have only become more significant. For example, mutual funds are not able to: (1) monitor on a consistent basis the arbitrage activities of short-term traders; (2) provide the appropriate volume or "breakpoint" discounts for sales loads offered to investors making larger purchases of fund shares; (3) evaluate the liquidity needs of investors in money market funds; and (4) ensure accurate and timely restitution and other distributions for investors aggrieved by the iimproper market timing or late trading activities by a particular fund.
For many years, CMFI has advocated that the SEC adopt additional regulatory measures to ensure that mutual fund prospectus policies and procedures are enforced uniformly for all mutual fund investors. This can be accomplished by providing funds with full transparency of investor-level information through each omnibus account, on a same-day or real-time basis.
Omnibus accounting is also being used by large broker-dealers to extract additional payments and fees from funds and their investors. In August 2010, CMFI released a White Paper that analyzes the fees being charged to support omnibus accounts. CMFI's analysis uncovered annual costs being imposed on individual investors of as much as $2.2 billion in account maintenance charges, more than $4.18 billion in shareholder servicing payments, and more than $2.09 billion in revenue-sharing payments. Many of these payments are completely unnecessary under existing regulatory rules and industry best practices.
Proper oversight of omnibus accounts is an important issue for individual mutual fund investors. Click on the tabs for Documents, Comments, and Blog Entries to review the latest developments on these hidden accounts.
